NATIONAL
DIVORCE & BANKRUPTCY CENTER
NATIONAL
DIVORCE & BANKRUPTCY CENTER
FILING BANKRUPTCY IMMEDIATELY STOPS: Debtors get much needed 'breathing room' and discharge or reorganize (chapter 13):
A borrower's bankrutpcy options on student loans are almost nill. Changes to the Bankruptcy Code in 1998 made student loans non dischargeable - unless the borrower can establish "substantial hardship" on the debtor/borrower and his family.
"Substantial hardship" has generally been defined to mean that the debtor cannot maintian a minimally adequate standard of living and repay the loan generally requiring a showing by the debtor that there is not likely to be a change in circumstances improving the debtor's ability to repay the debt.
Chapter 13 allows a debtor to repay student loans, IRS, and other unsecured debts over a 3-5 year period without interest, penalty, or late charges. Just stopping the ongoing interest and 'penalties' can be a tremendous relief to debtors.
Student loans are contracts and as such are subject to dispute for fraud, etc. just as any other contract. Student loans also are not enforceable when the school the debtor attended closed prior to the student completing his or her education.
Challenges should be raised during a chapter 13 proceeding and the issue decided by the bankruptcy judge. (in the usual chapter 7 case, there is no dividend to creditors and therefore no issue to be decided by the bankruptcy court unless an adversary proceeding to obtain a hardship discharge is pending).
What seemed like simple basic math when you signed your name to the loan application quickly turned into a lesson in quantum physics once the loan actually became due and payable.
Even before the average student has graduated, their student loan(s) have usually been sold, resold, and transferred several times. It becomes almost a game of musical lenders just trying to keep track of whose got the loan this month .
Most student loan borrowers have 'horror stories' about calling around to various lenders just to find out which lender and what address to send the payment to. Worse yet, are the varying lender statements that seem to change (almost certainly increasing) the balance owed with each change in lenders.
Whether by hook or by crook, lenders are notorious for their poor (very poor) state of record keeping when it comes to student loans. By the time the loan has been transferred several times it is usually unclear (if not impossible) to determine exactly what is owed and whether all of the additional extra charges tacked onto the loan are even in accordance with the law.
Debtors may use an objection to the claim of a student loan in a Chapter 13 to get a judicial determination of the rights of the borrower. In a bankruptcy, the burden of proof as to the exact loan amount and the validity of the 'extra' charges is on the lender who must 'prove' the amount of the debt to the bankruptcy court's satisfaction.
Once the bankruptcy judge determines what is duly owed on the student loan, the legal principals of estoppel should make the bankruptcy judge's decision binding on the lender even if it takes longer than the 3-5 years of the chapter 13 plan to repay the student loan.
Federal regulations limit the amount of a student/borrower's wages than can be garnished to repay student loans to 10% of the borrower's take home pay. BUT, the lender also has the option of intercepting (seizing) any tax refunds to be applied to the student loan. (Note: a newsgroup on the net reported that in a survey of lawyers around the country that had been in active practice for at least 20 years, 98% reported that in their 20 years of practice they had never seen an actual case where wages were garnished for student loan debt.)