Bankruptcy with student loans
Students who keep on borrowing indiscreetly for funding their education may realize too late that they are carrying a huge burden by way of accumulated student debts when the time comes for repayments. When the borrowers reach the point that they are no longer able to keep up with their commitments for payments, one of the avenues they may contemplate taking to get over the problem is to file for bankruptcy. But how viable is this?
1.Difficulties in proving Bankruptcy
Federal Loans are not dischargeable through bankruptcy.
If you are having a government sponsored loan or one issued by a non-profit making institution, then such a loan cannot be discharged by filing for bankruptcy and you will still have to pay back the loan in full even if you manage to get some other types of loans discharged.
Borrower has to prove that payments will impose “undue hardship” on him and his dependents.
Since October 1994, when some important changes were made to the Bankruptcy Law, it has become almost a futile effort to satisfy the requirements to get your loan discharged in this manner.
With regard to non-governmental loans too, the borrower will have to prove that repayment of the loan will create an undue hardship on him and his family in that he may not be able to maintain even a minimal standard of living if he were to pay the loan. It will also have to be demonstrated that an effort has been made to honor the payments; but that this level of hardship is now permanent and is not likely to improve substantially with time. But this will be a very difficult point to prove.
(The above criteria are based on the classic Brunner vs. New York State Higher Education Corp judgment of October 14, 1987 which is now commonly adopted in court cases in defining “Undue hardship” on the borrower in continuing to make repayments).
Only 10% of the borrower’s take home pay can be garnished to pay a student loan.
However, it may be some relief to learn that federal regulations restrict to only 10% of the student’s take home pay that may be garnished to repay a loan. 59 Fed. Reg. 22473.
2. Alternatives to an attempt at filing for Bankruptcy.
Don’t be afraid to have a frank discussion with your lender before approaching others pertaining to your problems on repayments. He may have had similar experiences with other borrowers and since he is also keen on recovering his money without the additional burdens of going to litigation, he will also try his best to work out some alternate arrangement to ease your burden while recovering his money too.
It is in your interest to try and work out some alternate arrangement before you go in to default of your loan, because once you are in default, the options available to you to normalize the situation would diminish.
After failing to compromise with your lender, there are various agencies you can go to that offer assistance on consolidation and / or in working out suitable alternate arrangements including rescheduled programs of repayments in keeping with your income / ability to pay.
3.Some of the other more common grounds on which Bankruptcy Claims may be made with more chances of success.
You may qualify to have your loan discharged by bankruptcy if you could not complete your study program under one of the following conditions:
1. The school closed while you were enrolled.
2. If you were on an approved leave of absence when the school closed.
3. The school closed within 90 days of your withdrawing from the school.
1. Your student loan can be forgiven and discharged in the event of your becoming totally and permanently disabled and if you discharge your other commitments during a 3-year conditional discharge period. Although your disability may be accepted for certain other purposes to the extent of your receiving your Social Security, VA or other Disability Benefits, you may still fail to meet the definition of total and permanent disability for purposes of student loans.
2. However, you will not qualify for discharge if you were already disabled and in that same condition at the time you applied for the loan.
3. Further, a parent who has obtained a PLUS Loan on behalf of a student who becomes totally and permanently disabled is not qualified to claim discharge of loan taken by him (the parent).
1. A loan will be fully discharged if the borrower dies.
2. In the case of a PLUS loan, the loan is fully discharged in the event of the death of the borrower (whether it is the student or parent).
3. On the death of a student on whose behalf a parent has taken a PLUS loan, that loan taken by the parent will be fully discharged.
o How does bankruptcy affect a student’s eligibility to qualify for future loans?
1.Since the Bankruptcy Reform Act enacted in October 1994, a student need not re-affirm a previous FFELP loan discharged through bankruptcy in order to be eligible to receive a new loan.
2.Financial Aid Administrators cannot deny any fresh loan under Title IV Grant Aid including the Perkins Loan Program to any prospective student borrower on the grounds of a previous bankruptcy filed by him (the student) on the bankruptcy determination. They may nevertheless, continue to consider his post bankruptcy credit history in determining willingness to repay the loan.
3.A rule of thumb here is that the student is eligible to receive additional student federal loans provided there are no disputes or defaults in respect of loans currently in repayment. Any previous loans discharged by bankruptcy should no longer be considered as in default for current purposes.
4.However, many bankruptcies could have an impact on eligibility for most private loan programs including some school loan programs which contain built-in provisions precluding borrowers with 7 – 10 year history in bankruptcy from borrowing again without a creditworthy cosigner. In such cases the borrower is advised to have a frank discussion with the lender, explain matters (especially if there were any extraordinary circumstances surrounding the said bankruptcy), and try to re-negotiate.
5.All matters and the law connected with bankruptcy pertaining to student loans are too numerous to explain here in detail and are beyond the scope of this article. In such rare cases where further information may be required, the student is recommended to seek the advice of your school loan administrator, your lender or any other lender/s of repute, and websites of relevant authorities that an Internet search could easily reveal.