Since high school, I knew that I wanted to be an attorney. I have been out of law school for 15 years, and still have another 15 before my student loans are paid off; making my student loans on par with a home loan. The one difference is that there is no collateral for my student loan - it is not like my student loan lenders can repossess the knowledge that I've gained during college, law school and beyond. What happens, however, if I am unable to pay back my student loans? Many former students face this question every day, and, unfortunately, more will face this question moving forward.
The Bankruptcy Code, section 523(a)(8) prohibits Federal Student Loans from being discharged in bankruptcy. Similarly, private loans issued by for-profit companies for any educational benefit are exempt from discharge under section 523(a)(8)(B). Congress intended that student loans be difficult to discharge because at the time of graduation the graduate's salary is at its lowest point, if he has a job at all, and debt is at its highest point. Although there is little empirical data to back up the analysis, Congress believes that the stigma of filing bankruptcy, and the other tests built into the bankruptcy code are not stringent enough to prevent savvy graduates from running up student loan debt and filing bankruptcy just after crossing the stage to pick up their diploma.
As with any rule, however, there are exceptions. Student loans can be discharged if the debtor can prove that repayment of the loan would subject the borrower to "undue hardship," an undefined term, thus open to court interpretation: The "Johnson" test examines the debtor's past finances and likely future finances, the debtor's good faith efforts to pay off the loan, and the debtor's motive in filing bankruptcy. The "Bryant" test is objective, finding undue hardship when the debtor's "after-tax net income is below Federal Poverty Guidelines." Some courts use the "Totality of the Circumstances" Test examining all of the circumstances surrounding the financial situation of the debtor including their financial resources, necessary expenses, and any other relevant factors. Finally, most courts which require the bankruptcy filer to prove: (a) an inability to maintain a minimal standard of living if forced to repay the loans; (b) whether any additional circumstances exist that show that the debtor's state of affairs is likely to persist for a significant portion of the repayment period; and (c) that there have been good faith efforts to repay the student loan(s).
Proving undue hardship is extremely difficult. Undue hardship means more than temporary or even severe financial difficulty. Debtors must establish that it will never be possible for them to pay off their student loans under any foreseeable or unforeseeable circumstance. In some cases, the debtor must have a fairly serious and permanent medical condition or disability that arose after incurring the student loans (from an accident, for example). In addition, discharge has been allowed in some cases where the debtor had extended periods of homelessness and an inability to find or maintain a place to live. The Middle District of Florida has adopted the three-part Brunner test used by the majority of the Country, although some judges have applied an additional factor - whether the debtor has made an effort to minimize monthly expenses.
What is the solution, outside of Congress amending the bankruptcy code? Federal Student Loans can be deferred, or put onto payment plans. If the student loan companies refuse to defer the debt, Chapter 13 might still be an option. Although not dischargeable, student loans are not priority debts either - meaning they are paid similar to other general unsecured debts. Thus, if the reorganization plan proposes to pay 25% to all unsecured creditors, then the student loan company will get 25% of what it is owed during the 5-year (60-month) term of the Chapter 13 plan and, at the end of 5 years, the remaining 75% would be owed, which can be renegotiated with the student loan company.
- Shawn M. Yesner, Esq.
For more information on Student Loan debts, judgments, Chapter 7, Liquidation, Chapter 13, Reorganization, and other debt issues, or to schedule a free initial consultation to discuss your options, please contact our firm at: 813-774-5737 or email me at: email@example.com.
Shawn M. Yesner, Esq., is the founder of Yesner Law, P.L., a Tampa-based boutique real estate law firm that helps clients eliminate debt by providing options, so they can live the lifestyle of their dreams. We assist clients withDebt Settlement, Chapter 7, Chapter 13, bankruptcy, liquidation, reorganization, short sales, loan modifications, and foreclosure defense, for clients in Westchase, Carrolwood,Tampa, Odessa, St. Petersburg, St. Petersburg Beach, Treasure Island, Medeira Beach, Reddington Beach, Kenneth City, Gulfport, Pinellas Park, Seminole, Clearwater, Clearwater Beach, Oldsmar, Dunedin, Safety Harbor, Palm Harbor, Lutz, Wesley Chapel, New Port Richey, Trinity, Port Richey, and other areas that comprise the greater Tampa Bay area.