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Student Loans in Bankruptcy:
The general presumption is that student loan debt cannot be eliminated in bankruptcy. As usual, it is more complicated than that. The first question is what is a student loan for purposes of bankruptcy? Two federal appellate courts have now ruled that private student loans may not be student loans for bankruptcy purposes, and may be eliminated in bankruptcy. The test for whether private student loans can be eliminated, per these courts (Massachusetts, covering New Hampshire, Puerto Rico, Maine, Rhode Island, and Massachusetts; and Louisiana, covering Louisiana, Mississippi, and Texas) is whether the loan is a 'qualified education loan' as defined in the tax code, or if it was made, insured, or guaranteed by a governmental unit or nonprofit institution. If neither of these conditions are met, it is not a student loan for bankruptcy purposes (at least in the above states) and can be eliminated in bankruptcy.
If it is a government guaranteed loan or does not qualify under the above provisions, there are some non-bankruptcy options that might be able to be used to eliminate the loan, such as some circumstances if the school closed while the student was attending, or if the borrower has a disability. Bankruptcy also provides an option to eliminate even loans that do not qualify to be eliminated on any of the above reasons if the court finds that repaying the loan would be an 'undue hardship.' Many of the older decisions put a very high burden on the debtor on showing this, though the trend seems to be to allow more loans to be discharged.
Even if none of these options appear useful, there are usually different plans to reduce the payment on the student loans depending on the borrower's income. Under some of these plans once the borrower makes payments for 20-25 years the balance of the loan would be forgiven.
It is critical to hire qualified counsel to analyze the student loans and determine if they can be eliminated or the payment reduced when a bankruptcy is filed.
Non-Bankruptcy Options for Eliminating Student Loans and additional Student Loan Elimination Information:
***The following section is still under construction
Cancellation of Student Loans
Public Service Cancellations
Child Care Cancellations
Relatives of 9-11 Victims Cancellations
Options for loans not in Default
Non-Income Contingent Plans
Standard Repayment Plan
Graduated Repayment Plan
Extended Repayment Plan
Income Related Repayment Plans
Income Based Repayment Plan (IBR)
Income Contingent Repayment Plan (ICR)
While it is difficult to eliminate student loans in bankruptcy, it may be possible. Generally, non-bankruptcy options for eliminating student loans should be examined first.
The first step is to determine what type of student loans you have. This can be done through the National Student Loan Data System (NSLDS) which is the U.S. Department of Education's central database for student loans.
To get information about your student loans here you need a PIN number. Only the borrower may get the PIN, which cannot be shared with others. You can apply for a PIN here. Once you have a PIN you can get further information on the types of loans you have, and may see options on the loans here.
Borrowers can also call the Federal Student Aid Information Center at 1-800-4FED-AID or 1-800-730-8913 (TDD) to determine what type of loan they have. For Direct loans borrowers can call 1-800-848-0979, or for Direct consolidation loans 1-800-557-7392.
If you have private student loans, you should request a copy of the loan agreement to see whether the lender promised specific benefits. You would then see if there is some claim or defense to the loan, and if not negotiate directly with the lender.
If you want to go back to school, and are in default in a student loan, you need to get out of default as soon as possible.
The best scenario, when it applies, is to seek cancellation of the student loan. If the loan qualifies for cancellation, then not only will the debt be eliminated, but all payments made on the loan should be refunded, and the credit report cleared.
If the school while you were enrolled, and you had a Federal Family Education Loan (FFEL), and federal Direct Loan Program loan (Direct Loan), or a Perkins loan received in part on or after 1/1/86. The closed school cancellation applies if your branch of the school closed even if the main campus or other branches stayed open. It should also apply if the student withdrew less than 90 days before the school closed, and may apply if the student withdrew more than 90 days before closure under exceptional circumstances. Such exceptional circumstances might exist where the school ceased offering the program the student was studying a few months before the school itself closed. A cancellation may still be warranted even if the school issued a certificate or diploma if the the school closed before the student could complete the course of study.
The US Department of Education maintains a list of closed school closure dates here. This list may contain errors, and if you believe your school closed but it is not shown here you may wish to check news reports, state regulators, other students, or former school employees. This information can be submitted to the Department of Education to request a change in the closing date.
For certain correspondence schools, the time between withdrawal and closure is extended. For American Career Training Travel/Hart Secretarial School (ACT) (Pompano Beach, Florida, main location) if the loan period started on or after March 1, 1988 the student may be eligible for discharge. Other schools include AMS Collecte, Home Study Division (Alpine, CA), Columbus School of Broadcasting (Las Vegas), County Schools (Bridgeport, CN), Global Academy (Atlanta, GA), National Training Systems, (Laurel, MD), Northwest Schools (Portland OR), Superior Training Services (Phoneix, AZ), United Schools (Clearwater, FL), and USA Training Academy Home Study (Newark, DE). These last ones allow application for cancellation if the loan was taken out within 12 months of closing.
Cancellation discharges might be unavailable if the student completed the course of study at another institution with an agreement with the closed school or who completed the course with a transfer of credits to another school.
If the student received a FFEL or Direct loan after January 1, 1986 and if the school falsely certified their eligibility for the loan, the borrower is eligible for cancellation of the loan. The false certifications eligible for this cancellation are:
1) certification of the ability of a non-high school graduate to benefit from the program,
2) the school enrolls a student who cannot meet the minimum state employment requirements for the job for which the student is training,
3) forgery or alteration of the loan note or check endorsement, or
4) if the borrower is a victim of identity theft.
If the school failed to pay a refund due to the student, a FFEL or Direct loan some or all of the student loan should be cancelled. This would include the situation where a student signed up for a school but never attended or where the student withdrew within a time frame entitling them to a refund.
Where the borrower has a total and permanent disability, and has an FFEL, Direct loan, or Perkins loan, the student should be eligible for loan cancellation. Parent Plus loans are eligible if either the student or if both of the parents are disabled. HEAL loans may be eligible under separate criteria.
Where the student worked in certain public service professions, they may be eligible for cancellation of direct loans, including Stafford, Plus, and consolidation loans. To qualify the students must not be in default, and must have made ten years of timely payments on their loans after October 1, 2007, and must have been employed in the public service job when each of the payments were made.
The jobs which should qualify include local, state, tribal, and federal government jobs, child or family service agencies, 501(c)(3) nonprofit organizations such as universities.
Teachers who have taught full time for five consecutive years at certain schools serving low-income families are eligible for a $5,000 cancellation of FFEL or Direct loans. The limit is increased to $17,500 for certain highly qualified math or science teachers or as special education teachers. Separate requirements are set for Perkins loans.
If a borrower has served a low-income community full time for over five years their FFEL or Direct loan may be eligible for a partial or full cancellation of the loans. The borrower must have a bachelor or associate's degree in early childhood education. This program may not be extended.
Perkins, FFEL, and Direct loans to certain relatives of 9-11 victims may be eligible for student loan cancellations. Eligible victims include spouses of eligible public servants (police, fire, armed forces members, etc, who died or became permanently and totally disabled from the attacks); and also for spouses and parents of eligible victims who died or became permanently and totally disabled from the attacks. The latter category may include Plus loans.
If you are not yet in default in the student loan, you should have more options to get a repayment plan. A summary of the available plans can be found on the US Dept Education Student Aid website. The various US Dept of Education calculators may help determine payments for plans on which the loan repayment is based on the income of the borrower. FFEL borrowers may change the repayment plan once per year, or more often at the lender's discretion. Direct loan borrowers can change the plan anytime once they have started repayment.
The standard repayment plan is the usual plan borrowers are assigned if they do not choose a different plan. This requires equal payments on the loan (adjusted for interest if the interest rate is variable) over five to ten years.
Under this plan the payment can begin at a lower payment and the payment increases over the life of the plan. The plan would usually not exceed 10 years, except as allowed under the Extended plan noted below, or for Direct Loans taken out prior to 7/1/06. These are an option for borrowers who are likely to see a significant and rapid raise in their income.
When the total principal and interest on the loans exceed $30,000 the borrowers can get a repayment period of up to twenty-five years. (Direct loans from prior to 7/1/06, or borrowers with 'exceptional circumstances' may get up to 30 years). Borrowers should understand that as interest continues to accrue, the total interest paid on the extended plan is substantially higher than the standard plan.
Plans on which the repayment amount is based on the borrower's income are called Income Contingent Repayment Plans. These usually result in the lowest available payment amounts, though the low payments can result in the balance of the loan actually increasing during the repayment term. However if the borrower makes the payments for 25 years, the remaining balance should be forgiven. Borrowers should note that the amount of debt forgiven might be considered taxable income by the IRS.
This plan is available to borrowers with FFEL loans, Direct Loans, or consolidated loans (unless the consolidated loan includes a parent PLUS loan). They are not available to private loans, Perkins loans (unless consolidated with Direct loans), or parent PLUS loans. If the debt qualifies, this plan usually results in the lowest payment.
The IBR plans require a partial financial hardship to qualify for the workout plan. A calculator for this plan is found here. Alternatively, to determine if this hardship requirement is met the borrower must make the following computation.
1. First determine the payments total annual payments the borrower would need to make under the standard ten year repayment plan.
2. Then determine the poverty guideline income for the borrowers family size and state (the 2012 figures can be found at https://aspe.hhs.gov/poverty-guidelines.
3. Take the applicable poverty guideline figure and multiply by 1.5.
4. Determine the borrower's annual adjusted gross income.
5. Subtract the figure from #3 from the figure from #4. This gives the amount by which the borrower's annual income exceeds 150% of the poverty guideline.
6. Multiply the figure from #5 by .15, this determines the payment that would be required under the IBR plan.
7. If the figure from #1 is more than the figure from #6 the hardship requirement is met.
If the borrower is married, file tax returns jointly, and both have student loans, then the computation is made based on the joint adjusted gross income and joint student loan debt.
For the first three years of the IBR plan, if the payments are insufficient to cover the interest on a subsidized Stafford or the subsidized amount of a consolidation loan, the government will pay the remaining accrued interest.
The IBR loans may be extended over more than 10 years. Payments on the IBR are applied in order to interest, collection costs, late fees, and only after these are paid to reduce the principal balance of the loan.
To apply for an IBR loan the borrower must contact each servicer separately, and complete each servicer's application forms. The borrower must either provide copies of the last tax returns.
The balance on any loan under an IBR repayment is forgiven after 25 years of payments. If the income is so low that the required payment is $0, then the $0 payments would count toward the 25 years. The 25 years of payments do not have to be consecutive, and can be under any of the repayment plan options (not just IBR) so long as the payments were the amount required under such plan. The amount of principal debt forgiven would normally constitute taxable income to the borrower.
If during the repayment term the debtor no longer qualifies for the plan, the payments revert to the standard payment amount, even if this means the payments have to extend for more than ten years.
The ICR plan is similar to the IBR, and like that program is an option for Direct loans or Graduate PLUS (but not Parent PLUS) loans that are not in default. Consolidated loans including Parent PLUS loans can also be paid through the ICR program. Payments use a similar formula described under the IBR plan, except the payment is based on 20% of any earnings above the poverty level. Like the IBR, any balance on the loan is forgiven after 25 years of payments. Usually the IBR formula will be more favorable to low income borrowers.
A calculator to determine the ICR payment may be found here.
The payment will adjust each year based on the borrower's income. If the income is below the poverty guideline, the payment is $0. If the borrower is married and living with the spouse, the joint income of the spouses will be used in making the computation. If the borrower is married, living together, and filed separate returns, a consent to allow review of the spouse's return is required.
Like the IBR plans, the low payments may result in negative amortization, resulting in an increasing loan balance on the student loan.
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