Student Loans Bankruptcy Chapter 7 - How To Bankrupt Your trainee Loans
Everyone knows that you cannot bankrupt student loans. search the web with the
keywords "bankruptcy" and "student loans" and you get either many listings for
lending institutions trying to get you to take out other loan, or you see articles
telling you that it is virtually impossible to bankrupt your student loans except
under the condition of "undue hardship"-- and then they fail to tell you anything
how to go about proving the condition. How frustrating!
Student Loans Bankruptcy Chapter 7
Below is a summary of the salient points given in Bankrupt Your student Loans and
Other extraction Strategies by Chuck Stewart, Ph.D. (Isbn 0-9764154-5-3). Here is
an author who has been straight through the process, successfully bankrupting ,000 in
student loans, and has written a clear, step-by-step, education by hand to help
other honest debtors in their efforts to have their student loans discharged straight through
bankruptcy or Compromise or Write-Off.
The bankruptcy courts originally treated student loans the same as any other
unsecured debt. student loans could be listed in a chapter 7 filing and fully
discharged. However, in 1976 Congress modified the Higher education Act of 1965
and required student loans to be nondischargeable unless: (a) the debt first became
due more than 5 years before the date of filing of the bankruptcy, or, (b) failure to
discharge the debt would cause "undue hardship" to the debtor or to dependents of
the debtor. In 1990, Congress extended the 5 year rule to 7 years and at last
eliminated the time limit altogether in 1998. Thus, the only choice debtors
currently have for bankrupting their student loans under 11 U.S.C.A. Bankruptcy
Reform Act (1998) §523(a)(8) is to prove repaying their student loans would cause
an "undue hardship."
"Undue Hardship" Analysis
Unfortunately, Congress failed to define the term "undue hardship." A review of the
discussion and moot by the legislature about the education amendment is
unrevealing as to the meaning of undue hardship. Thus, it has been left up to the
courts to conclude its meaning. Aggressive defense by branch of education
attorneys has influenced the court to a decidedly rigid interpretation. In general, for
a debtor to qualify for an undue hardship extraction of student loan debt, the debtor
must be living at, or below, the Federal Poverty Guideline and have no hope for
increased hereafter earnings titanic enough to make payments on the loans.
Over the past quarter-century, courts have developed many tests to conclude the
existence of undue hardship. The prominent test used in most court is the Brunner
Test. Other tests consist of the Bryant Poverty Test, Totality of the Circumstances
Test, and the Johnson Test. A review of these tests uncover some base
characteristics used by courts to conclude undue hardship. These include:
Characteristic A. An appraisal of the debtor's current living condition and the
impact that has on the quality to repay the loan while maintaining a "minimal living"
standard.
Characteristic B. The debtor's hereafter prospects for repaying the loan.
Characteristic C. Evaluate either or not the debtor demonstrated good faith during
loan repayment.
There are two steps complex to demonstrate Characteristic A--
1. Every court reviews the debtor's current living condition and evaluates it against
the Federal Poverty Guidelines. Debtors with incomes above poverty will be
scrutinized by the courts to assure all expenses are "minimized." Expenditures will
be compared to an "idealized" debtor of similar situation but at the valid poverty
level.
2. Once the court is satisfied the debtor has minimized living expenses, the court
evaluates either repaying the student loans will push the debtor down to or below
the poverty level.
Characteristic B is impossible to predict. Courts have recognized the folly in trying
to predict hereafter income, but it has not stopped them from together with it in their
analysis. Courts have considered many factors that may influence hereafter earnings
including personal limitations such as: (1) medical limitations, (2) retain of
dependents (and their medical conditions, if applicable), and (3) lack of useable job
skills. Courts have also considered some external factors such as age
discrimination (for debtors over age 50), having been labeled a whistleblower, and
other group and cultural factors that influence the quality to accumulate gainful employment.
Congress was most involved with debtors who seemingly "defrauded" the
government by bankrupting their student loans soon after graduation. To reinforce
that concern, courts want debtors to demonstrate "good faith" attempts at repaying
student loans. Characteristic C, Good Faith, means that the debtor must show that
he or she made payments on student loans whenever his or her earnings was above
the poverty level, or, when there was insufficient income, he or she accumulate
deferments or forbearances to keep the loan in good standing.
Income Contingency repayment (Icr) Plan
Even if a debtor clearly demonstrates that the undue hardship analysis applies to his
or her case, the earnings Contingency repayment (Icr) Plan may unravel the case.
The Icr allows student loan repayment to increase or decrease agreeing to the
income of the debtor. As such, if the debtor's earnings is below the Federal Poverty
Guideline, then the payment drops to zero. The plan lasts for 25 years and any
outstanding debt is discharge. However, the loan discharged amount is treated as
income by the Irs and earnings taxes will be due.
It is often stated by branch of education attorneys that Icr makes it impossible
for debtors to extraction their student loans in bankruptcy. They articulate that
anyone can make "zero dollar" payments, thus negating the undue hardship
exception of §523(a)(8). In many cases this is true. But for some debtors the Icr is
inappropriate. For example, imagine being 65 year or older living on Ssi or on a
fixed earnings and then a large tax liability descends upon you for debt discharged at
the end of an Icr plan. That would place an undue hardship upon you. In fact, the
Icr is beyond doubt inappropriate for anything over the age of 40 because of the tax liability
at the end of the repayment period.
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