Articles Posted in Student Loans

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By Kurtis Garbutt (http://www.flickr.com/photos/kjgarbutt/15420116119) [CC BY 2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia CommonsStudent loan debt is among the largest financial burdens Americans face, with many estimates placing the total amount of debt at more than $1 trillion. Bankruptcy law, unfortunately, only offers limited relief. Since 2005, nearly all student loans are excepted from discharge in bankruptcy cases, except in very limited circumstances. Many debtors must consider other options in addition to bankruptcy if their student debt becomes overwhelming. A series of debt relief measures recently announced by the federal Department of Education (DOE) may offer relief to some debtors. One can hope that the DOE’s actions also offer hope for additional reforms in the future.

The Bankruptcy Code identifies certain debts that are not dischargeable in bankruptcy. 11 U.S.C. § 523. These exceptions could be broadly categorized as (1) debts owed to the government or subject to a court order, such as certain tax debts or child support obligations; and (2) debts incurred through some fault of the debtor, such as those arising from civil judgments for fraud or other injury.

Student loans do not quite fit into either category. Prior to 2005, the only student loans excepted from discharge were those “made, insured or guaranteed by a governmental unit,” or made by an organization that receives government funding. 11 U.S.C. § 523(a)(8) (2004). The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. 109-8, amended that section to include private student loans as well.

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OpenClips [Public domain, CC0 1.0 (http://creativecommons.org/publicdomain/zero/1.0/deed.en)], via PixabayA federal district court in California considered a request to discharge federally guaranteed parent loans, which the debtors took out to pay for one of their children’s education. In re Mees, No. 2:13-cv-01892, order (E.D. Cal., Jul. 22, 2014). Student loan debt is not dischargeable in bankruptcy except in rare case of “undue hardship.” 11 U.S.C. § 523(a)(8). The bankruptcy court ruled that the parent loans were not dischargeable, applying the same legal standard used for student loans. The debtors appealed, arguing in part that the bankruptcy court erred in applying this standard. The district court considered this question but ultimately remanded the case to the bankruptcy court, finding that it applied the test incorrectly.

The debtors, a married couple, took out federally guaranteed parent loans for their son, the older of two, to pay for his college education. Parent loans, known as PLUS Loans, typically have a much higher borrowing limit and might be used to cover any gaps in financial aid available directly to the student. Unlike a student loan co-signed by parents, the student is not liable on a PLUS loan. No payments are due until the student completes or leaves school.

The debtors’ son never completed his degree. The balance of the parent loans is about $35,000. By the time of the court’s ruling, both of the debtors had been unemployed for substantial periods of time:  three years for the husband and 30 years for the wife. Their younger son is still a minor. The debtors filed for Chapter 7 bankruptcy in September 2011. They filed an adversary proceeding several months later, seeking discharge of the parent loans. The bankruptcy court ruled against them, citing the three-prong test for determining “undue hardship,” known as the Brunner test after Brunner v. New York State Higher Educ. Svcs., 831 F.2d 395 (2d Cir. 1987). Continue reading

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mireyaqh [Public domain, CC0 1.0 (https://creativecommons.org/publicdomain/zero/1.0/deed.en)], via PixabayPersonal bankruptcy under Chapters 7 and 13 offer ways for people to obtain financial relief when their income is not high enough to continue making required payments on their debts. The federal Bankruptcy Code deals with different types of debt in different ways. The Bankruptcy Code establishes that certain types of debt have priority over others, and these creditors are therefore entitled to payment from the bankruptcy estate first. While many debts may be subject to discharge at the end of a personal or business bankruptcy case, some debts are expressly excepted from discharge, such as debts for recent taxes or child support obligations. However, these priority debts can be paid back via a Chapter 13 over a period of 3 to 5 years. Understanding how bankruptcy law treatss various types of debt is critical to planning and preparing for a bankruptcy filing.

Secured vs. Unsecured Debt

A key distinction in bankruptcy is between secured and unsecured debts. A secured debt has one or more specific items of property attached to it, known as collateral. See 11 U.S.C. § 506. A secured creditor has the right to take possession of the collateral if the debtor defaults on their repayment obligation. A mortgage, for example, is typically secured by the real property purchased with the mortgage loan.

Unsecured debt does not have collateral. The Bankruptcy Code divides unsecured debts into priority and nonpriority debts. 11 U.S.C. § 507. Many priority unsecured debts are also included in the list of debts excepted from discharge. 11 U.S.C. § 523.

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student-849825_640As of late 2015, about 40 million people in the United States owed a total of $1.2 trillion in student loan debt, an average of $30,000 in debt per student loan borrower. Reform of the student loan system is likely to be a significant issue in the upcoming presidential election, and student loans have become a topic of much discussion in the media, much of it of questionable accuracy. The arrest of a man in Houston, Texas in February 2016, supposedly due to student loan default, made headlines around the country, but the situation was not as straightforward as initial reporting made it seem. The use of federal marshals to enforce student loan debt at all still seems troubling, but this might at least be one area in which bankruptcy, through the automatic stay, can offer some immediate assistance.

Part of what makes student loan debt so pervasive is its distinctive treatment by the federal Bankruptcy Code. Certain types of debt are not subject to discharge at the end of a bankruptcy case. Most of these types of debt are based on factors like the fault of the debtor, such as cases of fraud or embezzlement, certain tax debts, and domestic support obligations like child support.

Student loan debt, both public and private, is also included on the list of nondischargeable debts, 11 U.S.C. § 523(a)(8), although the rationale for its nondischargeability may not be as clear. The only exception is when repayment would cause “undue hardship” to the debtor or the debtor’s dependents, but courts interpret this very narrowly. See Brunner v. N.Y. State Higher Educ. Svcs. Corp., 831 F.2d 395 (2d Cir. 1987); In re Pena, 155 F.3d 1108 (9th Cir. 1998).

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click [morgueFile license (http://www.morguefile.com/license/morguefile)], via morgueFileStudent loans present one of the greatest challenges for debtors in Chapter 7 and Chapter 13 personal bankruptcy cases. Federal law prohibits the discharge of almost all student loan debt, except when a debtor proves that denying a discharge would cause “undue hardship” to them and their dependents. 11 U.S.C. § 523(a)(8). Most courts have interpreted “undue hardship” very narrowly, using the three-part Brunner test. See Brunner v. N.Y. State Higher Educ. Servs. Corp., 831 F.2d 395 (2d Cir. 1987); In re Pena, 155 F.3d 1108 (9th Cir. 1998). While this has been the standard in most of the country for years, a few voices of dissent have emerged. A 2013 decision from the Ninth Circuit’s Bankruptcy Appellate Panel (BAP), for example, criticized the Brunner test as “too narrow,” stating that it “no longer reflects reality and should be revised.” In re Roth, 490 B.R. 908, 920 (BAP 9th Cir. 2013) (Pappas, J. concurring). Whether these voices have a lasting impact remains to be seen.

Most jurisdictions, including the Ninth Circuit, use the Brunner test, which requires a debtor to establish (1) that continued payment of the student loans would prevent them from maintaining even a basic standard of living, (2) that this state of affairs is likely to continue for the foreseeable future, and (3) that the debtor has attempted to make payments on the loans in good faith. Brunner, 831 F.2d at 396. Other jurisdictions use a “totality of the circumstances” test, which takes an individual debtor’s circumstances more into account. See In re Long, 322 F.3d 549 (8th Cir. 2003).

The “good faith efforts” requirement of Brunner can cause problems for debtors, since it invites a bankruptcy judge to second-guess how a debtor has prioritized debt payments before filing for bankruptcy. The term “good faith” is inherently ambiguous, which can also make it difficult to evaluate different debtors in different circumstances. This difficulty played a key role in the Roth case.

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OpenClipartVectors [Public domain, CC0 1.0 (https://creativecommons.org/publicdomain/zero/1.0/deed.en)], via PixabayStudent loans present a uniquely difficult obstacle to debtors in bankruptcy. Federal law completely excepts student loans from discharge, unless a debtor can show “undue hardship” to themselves and their dependents. 11 U.S.C. § 523(a)(8). Most courts around the country use a three-prong test to determine if a debtor has established “undue hardship,” known as the Brunner test after Brunner v. N.Y. State Higher Educ. Svcs., 831 F.2d 395 (2d Cir. 1987). The Ninth Circuit, which includes California, adopted the Brunner test in In re Pena, 155 F.3d 1108 (9th Cir. 1998). A California bankruptcy court recently considered a debtor’s claim of undue hardship in an order that includes an in-depth review of the Brunner test. In re Shells, No. 11-26042, Adv. No. 14-2111, mem. dec. (Bankr. E.D. Cal., May 7, 2015).

The debtor in Shells obtained student loans for her bachelor’s and master’s degrees. According to the court, she consolidated several private loans into a single U.S. Department of Education (DOE) loan in 2007, with a principal balance of over $96,000 at 7.375 percent. She has reportedly been employed full-time by the county since 1998, and she claimed a net monthly income of just under $6,000. Her husband is disabled, and the two of them have three children.

At the time of the court’s order in May 2015, the student loan balance had grown to more than $137,000. The court noted that the debtor had obtained an Income-Contingent Repayment (ICR) plan in late 2008, which reduced her monthly payment. She reportedly defaulted on the ICR plan twice. She filed for Chapter 7 bankruptcy in March 2011 and received a discharge, which did not include the student loans, that June. She received an Income-Based Repayment (IBR) plan in March 2013 but reportedly defaulted again. After reopening her Chapter 7 case in April 2014, the debtor filed an adversary proceeding against the DOE to discharge the student loan debt. The DOE moved for summary judgment.

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Joshua Davis [CC BY-SA 2.5 (http://creativecommons.org/licenses/by-sa/2.5/deed.en)], via Wikimedia CommonsFederal bankruptcy law specifically excepts student loan debt from discharge, unless a debtor can meet the difficult burden of demonstrating “undue hardship” to themselves and their defendants. 11 U.S.C. § 523(a)(8). A recent decision from the Ninth Circuit Court of Appeals involved a Chapter 13 debtor’s claim that her student loan debt was dischargeable. The court affirmed the bankruptcy court’s order discharging most of the debt, reversing the district court’s order. Kelly v. ECMC, et al. (“Kelly I”), Adv. No. 2:10-ap-01681, judgment (Bankr. W.D. Wash., Jul. 18, 2011); ECMC, et al. v. Kelly (“Kelly II”), No. 2:11-cv-01263, order (W.D. Wash., Apr. 20, 2012); Kelly v. Sallie Mae, et al. (“Kelly III”), No. 12-35377, slip op. (9th Cir., Feb. 27, 2015).

According to the district court, the debtor obtained a degree from Seattle University in political science in 1992. By the time she filed for Chapter 13 bankruptcy in March 2008, her total student loan debt was more than $105,000. She filed an adversary proceeding in November 2010, claiming “undue hardship.” To establish undue hardship in most jurisdictions, a debtor must satisfy a three-part test, known as the Brunner test after Brunner v. N.Y. State Higher Educ. Svcs. Corp., 831 F.2d 395 (2d Cir. 1987):  (1) At current income and expense levels, the debtor would not be able to maintain a “minimal standard of living” if required to repay the student loans; (2) additional circumstances indicate that this financial condition is likely to continue for a substantial part of the repayment period; and (3) the debtor has made “good faith efforts to repay the loans.”

The bankruptcy court found that the debtor had satisfied all three parts of the Brunner test. It ruled that all but $21,706.51 of her student loan debt was dischargeable and ordered her to repay the balance in $250 monthly payments over nine years.

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Scott Maxwell, LuMaxArt [CC BY-SA 2.0 (https://creativecommons.org/licenses/by-sa/2.0/)], via FlickrPresident Obama issued an executive order on June 9, 2014 intended to alleviate the burden on people struggling to repay student loans. Student loan debt and the cost of college have both grown at explosive rates in recent years, while the job market has remained comparatively stagnant. Defaulting on student loan debt can have devastating consequences, but unfortunately the White House’s executive order does not address many of the most pressing problems. Of course, there is only so much that an executive order can do, but it is important to note that the order only makes student loans, rather than college, more affordable. Most importantly, an executive order cannot modify or repeal the provisions of federal bankruptcy law that exclude student loan debt from discharge.

In the past 15 years, student debt has increased by over 500 percent, according to the Huffington Post. In roughly the same time period, average salaries for young people entering the job market have decreased by approximately 10 percent. People owe more coming out of school but have less opportunity to earn money to repay it. Over 40 million people currently hold student debt in the United States, an amount roughly equivalent to the entire population of California and Nevada. Of those people, an estimated seven million have defaulted on their loans.

President Obama’s executive order expands the “Pay As You Earn” program by directing the Department of Education (DOE) to cap payments on all federal student loans at 10 percent of the debtor’s income. It also directs the DOE to increase publicity for several existing repayment programs, which are intended to help debtors struggling with making payments before they default. The Income-Based Repayment plan, for example, adjusts monthly payments based on a debtor’s income and allows loan forgiveness under certain circumstances. Continue reading

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liftarn [Public domain, CC0 1.0 (http://creativecommons.org/publicdomain/zero/1.0/)], via OpenclipartStudent loans are a substantial–and growing–burden for many Americans, especially those who are just now entering the job market after college. The increasing cost of higher education is a major concern for current and future students, and the inability to discharge student loan debt in bankruptcy affects every single borrower in the nation. A recent bill, introduced by Massachusetts Senator Elizabeth Warren, would have offered the possibility of relief from high interest rates for student loan borrowers. The White House endorsed the bill, but it died in the Senate in mid-June. While it would have offered relief to debtors, it would not have addressed the issues of cost or discharge in bankruptcy.

According to a report from the nonprofit organization American Student Assistance (ASA), about twenty million people attend college every year in the U.S., and about twelve million of them borrow money to do so. About thirty-seven million people have outstanding student loan debt, in a total amount approaching $1 trillion. The largest group of debtors by age, accounting for fourteen million people, are under thirty. CNN reports that the average amount of student debt for the class of 2012 was $29,400, an increase of almost $3,000 over the previous year. The general consensus seems to be that student loan debt is hindering the U.S. economy.

Legislation passed by Congress and signed by President Obama last year tied federal student loan interest rates to financial markets, which had the effect of lowering rates for the school year starting in 2013. Interest rates on subsidized Stafford loans doubled on July 1, 2013, from 3.4 to 6.8 percent, after Congress was unable to pass new legislation. As a result, Congress passed a new bill the following month, which the president signed into law on August 9, 2013. It reduced students’ rates to 3.86 percent. Continue reading

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By Kit from Pittsburgh, USA (Grads Absorb the News) [CC-BY-2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia CommonsStudent loan debt presents a significant problem for individuals seeking bankruptcy protection under Chapter 7 of the Bankruptcy Code. Federal law specifically excludes student loans from discharge, unless a debtor can show “undue hardship” to themselves or their dependents. 11 U.S.C. § 523(a)(8). Most courts have adopted a three-part test, known as the Brunner test, to establish undue hardship. The third part requires a debtor to show a good-faith effort to repay the student loan debt. This requirement is difficult to define, as the Ninth Circuit’s Bankruptcy Appellate Panel (BAP) showed in In re Roth, 490 B.R. 908 (BAP 9th Cir. 2013).

The debtor took out over $33,000 in student loans between 1989 and 1995. Thirteen loans were made through the Federal Family Educational Loan Program (FFELP), and five were made directly through the Department of Education (DOE). She reportedly made no voluntary payments on the FFELP loans, and had defaulted on all of them by 2001. She made one attempt to seek forbearance, by which she could reduce or postpone her payment obligations, but never attempted to restructure or modify the payment terms of the loans. The DOE garnished the debtor’s wages for its five loans. The debtor reportedly claimed that she thought the garnishment covered all eighteen loans. The FFELP creditor was apparently unable to garnish her wages because of the DOE’s garnishment order.

The debtor filed for Chapter 7 bankruptcy in January 2009, seeking discharge of all of the loans. She testified to the bankruptcy court that she suffers from multiple chronic medical conditions and physical injuries, which have impeded her efforts to find employment. The Brunner test, named for Brunner v. N.Y. State Higher Educ. Servs., 831 F.2d 395 (2nd Cir. 1987), requires a debtor to show inability to maintain a “minimal standard of living” if forced to continue loan payments, circumstances that make the current situation likely to persist for much of the repayment period, and “good faith efforts” at repayment. Id. at 396. Continue reading