Tips and Tricks for Dealing
with Student Loans in
Are you in student loan servitude? Chapter 13 might buy you some real relief.
It is difficult if not close to impossible to get rid of student loans in a bankruptcy case. Under the Bankruptcy Code, a bankruptcy discharge does not operate against government and most private student loan debt “unless excepting such debt from discharge . . . would impose an undue hardship on the debtor and the debtor's dependents.” 11 U.S.C. § 523(a)(8).
But what constitutes “undue hardship”? Most courts have adopted the “Brunner Test” which says that a bankruptcy debtor must show that he (1) he or she cannot maintain, based on current income and expenses, a “minimal” standard of living for himself or herself and any dependents if forced to repay the loans; (2) additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and (3) he or she has made good faith efforts to repay the loans. Brunner v. New York State Higher Educ. Services Corp., 831 F.2d 395 (2d Cir. 1987).
While there are many poor and impoverished people that could meet the burden of “undue hardship”, it takes a special lawsuit within a bankruptcy case to get rid of student loans. The proverbial “Catch-22” is that the people that can get rid of student loans in a bankruptcy case are not usually in a position to muster the resources of an attorney that could file and prosecute the necessary lawsuit to seek discharge of such loans.
For everybody else, they just have to weather the storm and pay their student loans or work out a deal with the lender that makes the payments somewhat tolerable while in their never-ending student loan servitude.
Question: Okay, I have a decent job but not rolling in the bucks; is there anything I can do about managing my student loan debt if I have tried to get the best payment schedule and that is just not enough?
Answer: Why, YES THERE IS!!!
Here are a couple of tricks that I have employed in real cases to deal with non-dischargeable student loans in a favorable manner:
Case Scenario #1: This case was a young attorney making about $78,000 per year in his first couple of years of law practice. However, he graduated law school with a whopping $217,000 in student loan debt. He had also racked up credit card debt of about $58,000. Even if we knocked the credit card debt out in a Chapter 7, he would have still been required to pay about $2,000 per month on his surviving student loans.
What to do? File a Chapter 13 with a 5-year plan. After accounting for all of his particular reasonable monthly expenses, he could afford about $560 in monthly plan payments -- which were a lot less than the $2,000 the student loan creditors wanted.
His student loan creditors were stayed from any collection activity for the 5 years of his bankruptcy case. They also received the lion’s share of pro rata distributions in the case because of the disproportionately high ratio of student loan to other debt.
At the conclusion of the case, he got a discharge of the credit card debt but had to start once again servicing the student loan debt. Depending on whether the distributions in the case exceed the interest on the student loan, they may have been higher than when he started. But what the client got was a reprieve during the time he was most in need, a young earner who was early in his career and hoped to be making a lot more money 5 years down the line.
He got to have a life and enjoy living in the City and not be in miserable service to his debt.
Case Scenario #2: Parents have a student loan that they co-signed with their student-child of $11,000. For reasons other than the student loan, the parents are in a Chapter 13 bankruptcy case. It just so happens that the distribution to general unsecured creditors in the case will total about $18,000. The trick in a Chapter 13 is that we can pay the co-signed student loan creditor in this instance 100% of the $11,000 due. The rest of the creditors will share on a pro-rata basis the remaining $6,000. Not a bad result to have the bulk of the money to be distributed to the one creditor that would otherwise survive the bankruptcy case. At the conclusion of their bankruptcy case, they will have all of their unsecured debt discharged, and the student loan that they and their son were on the hook for will have been paid-in-full. Not a bad result!
Are you in student loan servitude? Don’t despair! Call San Francisco Bankrutpcy Attorney Marty Courson to see how bankruptcy might work in your favor.
By: Marty Courson