In the final segment of the series, we will be discussing the process or procedure for getting your student loans discharged. Student loans do not automatically get discharged when you file the bankruptcy case.
They are presumed to be non-dischargeable unless you file what is called an adversarial proceeding complaint seeking a discharge of your student loans based upon undue hardship. The adversarial proceeding is associated with your bankruptcy case, but it’s a totally different proceeding with a different case number.
The first step is to determine if you meet the requirements previously mentioned so you have a likelihood of success when you file the adversarial proceeding. There is a process of collecting your student loan payment history and noticing the proper defendants when the lawsuit/adversarial proceeding gets filed.
There is now an attestation form that is filled out with supporting documentation to streamline the process. This is intended to encourage the department of education and trustee’s office to be able to stipulate to some facts without unnecessary litigation. The attestation form goes over some of the same categories as the bankruptcy petition such as your current income and expenses, future inability to repay your student loans, prior efforts to repay your student loans, and current assets.
There is additional costs associated with the adversarial proceeding such as additional attorney’s fees so you would need to budget the attorney’s fees and costs to file both the bankruptcy case and your student loan adversarial case. A ballpark estimate for both would be approximately $5,000-$6,000.
In Part VI of our series, we are discussing the possibility of getting a partial discharge of your student loans if you are unable to get a full discharge. A partial discharge can occur where the bankruptcy court discharges a portion of the outstanding student loan debt while requiring you to pay the remainder of the balance. The bankruptcy code is silent on the issue of whether the bankruptcy courts may offer a partial discharge of student loans based on undue hardship. However, this issue has been litigated and is recognized by several court of appeals. A partial discharge will require that the debtor establish elements necessary for an undue hardship determination.
According to the departmental guidance regarding student loans, the department of education attorneys may consider a partial discharge if they have made the determination that the debtor has the ability to make some payment on the loan while maintaining a minimal standard of living, but an inability to make the full standard monthly repayment. That is distinguishable from getting a full discharge where the debtor is completely unable to maintain a minimal standard of living and has no disposable income after paying their expenses. A partial discharge should result in a balance lower than the debtor’s discretionary income so they can afford the monthly loan payment over the remaining term of the loan. A partial discharge may also be available if a debtor can liquidate assets to pay a portion of the debt but is unable to make the monthly payment while maintaining a minimal standard of living.
In the last part of our series, we will be discussing the process/procedure to get my student loans discharged?
We are continuing our series about student loan dischargability. The next potential inquiry by the Department of Education is whether the debtor’s assets must also be considered in the undue hardship analysis. The Department of Education should not consider assets that are not easily converted to cash, such as the debtor’s homestead or retirement account funds. Funds that are in a regular savings account or brokerage account maybe considered to determine your ability to repay your student loans. There is no bright line test in terms of how much money/assets would disqualify a person from getting a student loan discharge. It is taken in totality with other factors to be considered, such as your present and future ability to pay your loans.
The Department of Justice guidance is specific to Direct Loans (Federal student loan made directly by the U.S. Department of Education), not FFEL (Loans included in the FFEL program include Subsidized Federal Stafford Loans, Unsubsidized Federal Stafford Loans, FFEL PLUS Loans, and Consolidated Loans), Perkin Loans (A Perkins loan is a subsidized loan, meaning that the federal government pays the loan’s interest while you are in school) or private student loans.
If there is any question as to which loans are dischargeable or if you assets would be considered, it is best to consult with an attorney. In our next segment of the series we will be discussing when is a partial discharge possible, if the debtor is ineligible for a full discharge of their student loans.
In assessing what courts call the “good faith” standard, the Department of Education will focus on objective criteria reflecting the debtor’s reasonable efforts to earn income and manage his/her expenses. A debtor will not be disqualified based on past non-payment if other evidence of good faith exists. They will review the debtor’s payment history.
The Department of Education will look to see if the debtor has contrived a hardship for the purpose of getting their student loans dismissed. Examples of good faith include: (1) making payments (2) applying for deferment or forbearance (3) applying for income based repayment options (4) applying for federal consolidation loans (5) responding to outreach from a servicer or collector (6) discussing payment options, forbearance and deferment options, or loan consolidation with the Department of Education; (7) engaging a third party they believed would assist them in managing their student loan debt and/or (8) Debtor’s efforts to obtain employment to maximize income and minimize their expenses.
Acceptable explanations, or evidence for not enrolling in an income-based repayment plan include: (1) the debtor was denied or discouraged from using income-based repayment and instead relied on an option like forbearance, or deferment; (2) the debtor was provided inaccurate or incomplete information about the merits of an income based repayment plan; (3) debtor believed that an income based repayment program would not have improved their financial situation; (4) debtor was unaware that an income based repayment was an option; or (5) debtor was concerned with the potential tax consequences of loan forgiveness at the conclusion of an income based repayment program. Our next blog will address how the debtor’s assets play a role in dischargeability of student loans.
The next step in the analysis for the Department of Education, after determining your present ability to pay your student loans is to evaluate your future ability to pay your student loans. The debtor is presumed to have an inability to repay their student loan debt in the following circumstances: (1) debtor is age 65 or older; (2) debtor has a disability or chronic injury impacting their earning potential; (3) debtor has been unemployed for at least five of the last 10 years; (4) debtor has failed to obtain a degree for which the loan was procured; or (5) the loan has been in a payment status other than “in school” for the last 10 years. Where such factors are not present, the Department attorney will assess whether the debtor’s present inability to pay is likely to persist. This is a rebuttable presumption.
For example, if the debtor has not finished a degree, but has job offers and is making more money than if they would have if they obtained their degree, then it would be rebutted that the debtor has the ability to pay their student loans since the lack of a degree is not affecting his/her earning potential. If the borrower is married, the spouse’s income will not be counted in determining undue hardship eligibility, provided that the joint debtor is not a co-borrower on the student loans. This is different than the requirement on the bankruptcy petition which requires the debtor to include their spouse’s income even if the spouse is not filing for bankruptcy.
There is no presumption of inability to pay if the debtor obtained their degree in a field with limited earning potential. If debtor has $100,000 in student loans but doesn’t have earning potential of ever making $50,000 with their degree, the debt won’t get discharged. Someone in that situation would need to do an income-based repayment. Our next blog will examine the Department of Education’s standard of good faith efforts to repay your student loans to obtain a discharge.
For this segment we are providing an explanation of what the” present ability to pay” or “undue hardship” standard means. If you are reading this blog, you probably do not feel like you have the current ability to pay your student loans. The undue hardship/present ability to pay is a standard looked at by the Justice Department and the Department of Education to determine if you can afford to pay back your student loans.
If your expenses exceed your gross income (the amount you make before taxes or payroll deductions are taken out) you are presumed to lack the present ability to pay. These might not be your actual expenses, but rather expenses that are specified in the IRS guidelines. Where your expenses for items such as food, housekeeping supplies, apparel, medical expenses, etc. are below the amount allowed by the IRS National Standards and your net income does not cover those expenses you cannot maintain a “minimal standard of living”. Keep in mind your actual expenses may vary from what the IRS guidelines find to be reasonable. Similar guidelines operate in the means test of the bankruptcy petition.
For example, pet expenses are not considered. There are limitations on transportation expenses which includes gas, insurance, and vehicle maintenance. If you do have a reasonable expense that exceeds the IRS standards, those can be considered. You must have a persuasive reason why your expenses are higher than the IRS guidelines.
For example, higher medical expenses due to an ongoing medical condition or higher transportation expenses because you live far from work. In addition to National Expense Allowance Standards, there are also Local Standards. If your actual expenses exceed the local standard amount, the Department Attorneys should generally limit your allowable expenses to the standard amount.
If you have reasonable expenses that are not yet incurred such as currently living with a family member, but moving to an apartment in the future those expenses are considered. If you have sufficient discretionary income to make a full student loan payment as required under your loan agreement, then you are deemed to have the ability to pay and have no undue hardship.
The standards are a bit tricky so its helpful to consult with an attorney to determine if you qualify for partial or full discharge of your student loan. Stay tuned for our next segment on the “future ability to pay” standard.
