Tag Archives: discharging student loans

January 2017 Chicago Bankruptcy Question and Answer Podcast with Joseph Wrobel

Chicago bankruptcy and consumer credit attorney Joseph Wrobel shares news and updates in bankruptcy law as well as business and consumer financial matters. It has been documented that financial troubles can cause all sorts of ailments, the most common of which is sleeplessness. Joseph Wrobel helps clients alleviate their anxiety created by the inability to pay bills and the embarrassment of financial distress. Click/tap here to listen to this podcast interview anytime.

Sample questions answered in this 30-minute show:

  • What happens when my cosigner files for bankruptcy and I am still making loan payments?
  • Is filing bankruptcy the best option when there is a significant lawsuit filed against you?
  • Do I still have to pay when a credit card company writes off a debt as a charge off?
  • Can my tollway fines, and other tickets be included in a Chapter 7 bankruptcy?
  • Can I file bankruptcy to reduce or remove past child support obligations?

Joseph Wrobel has been a practicing attorney since 1973 and has experience in a wide variety of law relating to legal matters for individuals and families. Wrobel helps clients get out of debt and get a fresh start. He is an active member in several bar associations and the Bankruptcy Panel of Pro Bono Program of the Chicago Volunteer Legal Services. After serving the U.S. Army Reserve 363rd Civil Affairs Unit, Wrobel earned a B.A. in Psychology from Northwestern University and in 1973, he earned a JD from DePaul University Law School.

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Visit our Chicago Bankruptcy website online for more about the firm or call for more information at (312) 781-0996 or e-mail at JosephWrobel@ChicagoBankruptcy.com.

The undue hardship test and student loan bankruptcy

The undue hardship test and student loan bankruptcy is an interesting study. While the current outlook for bankruptcy protection extending to public and private student loan debt is bleak, there are people who have successfully obtained partial or full discharges of student debt. The bankruptcy laws have changed over time from more liberally allowing student loan discharge to making it practically impossible. The individuals seeking student debt discharge in bankruptcy must make arguments to the bankruptcy court that they have significant impairments or inabilities to earn enough income to pay their student loan debt that it becomes nearly inescapable and would create an undue hardship on them and their dependents. Some judges appear to be siding more with debtors for seemingly humane reasons, which sounds more like the treatment of student loan debt in bankruptcy in the early 1970s.

Many factors could lead a student to seek a discharge of their student loan debts. A student may not graduate from a program, might not be able to obtain a license to practice their chosen profession, or might become incapacitated and unable to earn income. Should the honest but unfortunate debtor have to lie awake at night worrying about 25 years of debt?

Following a sharp increase in student loan default in the mid-70s, Congress tightened the bankruptcy code.

Prior to a change in the law in 1976, the bankruptcy code allowed for student loan discharge. During the early 1970s, the poor economy and growing rates of federal and private student loan defaults led to Congressional pressure to update the bankruptcy laws to tighten bankruptcy regulations as they applied to student loans. In a recent article highlighting the history of student loan treatment in bankruptcy, it is noted that, “between 1973 and 1975, the number of students filing for bankruptcy had jumped from just under 30 percent to nearly 60 percent.[i]” The 1976 amendment to the bankruptcy code prevented discharge of government student loans during the first five years of repayment. In 1984, an amendment made all private student loans non-dischargeable, but for the narrow exceptions in the bankruptcy code.

The Brunner Test for “undue hardship” sets a high bar for student loan debtors.

In 1987, the “undue hardship” test, known as the Brunner Test, was adopted in the case of Marie Brunner v. New York State Higher Education Services Corp. The three part test requires that student loan debtors must prove all of the following: “(1)that the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for herself and her dependents if forced to repay the loans; (2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and (3) whether the debtor made good faith efforts to repay the loans.[ii]” In many cases, the third part of the Brunner Test stops bankruptcy applicants from either receiving a discharge, as many stopped paying or never made payments.

In 2005, following twenty more years of added restrictions, “Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which made it so that no student loan – federal or private – could be discharged in bankruptcy unless the borrower can prove repaying the loan would cause “undue hardship.[iii]” Unless you can prove sever disability, it is incredibly difficult to pass the Brunner Test for undue hardship.

Few bankruptcy filers attempt to have their student loans discharged, but it can happen.

The suggestion in one study however, is that so few people filing for bankruptcies actually try to prove they qualify under the Brunner Test to receive a partial or full discharge. The study by a Harvard researcher in 2007 shows that out of 169,774 bankruptcy filers, in that year only 213 people tried to have their student loans discharged through filing an adversary proceeding. Fifty-one of those filers received a full discharge and 30 received a partial discharge. Eighty-one of 213 filers receiving partial or full discharge give some hope that while unlikely, it is possible that student loan borrowers can obtain relief from student loans under extreme circumstances.[iv]

The Chicago bankruptcy law firm, Joseph Wrobel, Ltd., serves Chicago area individuals seeking a fresh financial start through the laws and protections of the bankruptcy code. There are several options that might be available to clients after one of the Joseph Wrobel, Ltd. experienced bankruptcy attorneys review the client’s complete current financial history.

Joseph Wrobel, Ltd. helps people get control of their finances and a fresh start at financial freedom. The firm’s website contains informative videos about financial issues as well as bankruptcy protection for families who want a fresh start. To keep in touch and read about consumer finance news and stories you can “Like” the firm’s Facebook page and “Follow” Joseph Wrobel. Ltd. on Twitter. If you need immediate legal assistance, please call Joseph Wrobel, Ltd. by calling (312) 781-0996 to talk to an attorney today.

 

[i] Yes Magazine, Think Students Can’t Declare Bankruptcy? Think Again, by Araz Hachadourain, Sept. 23, 2015.

[ii] Janet Rose Roth v. Educational Credit Management Corporation, Bk.No. 09-00317-RJH, Filed Apr. 16, 2013.

[iii] Business Time, Why Can’t You Discharge Student Loans in Bankruptcy, by Kayla Webley, Feb. 09, 2012.

[iv] American Bankruptcy Law Journal, Vol. 86, An Empirical Assessment of Student Loan Discharges and the Undue Hardship Standard, by Jason Iuliano, Sept. 25, 2012 (see p. 505)

Debate: More talk about potential downfalls of allowing for student loan bankruptcy relief

So many Americans are afraid of any “bursting bubble.” The bursting housing bubble, for example, crippled many individuals and families when home values dropped and people went from having equity in their homes to being upside down. When jobs in several industries were scarce, many people lost their savings. Too many innocent single parents ended up moving in with their own mothers and fathers to give their kids food and shelter.

Can student loan bankruptcy allowances lead to a bursting student loan bubble?

Student debt is incurred through public and private lenders. Some loans are secured by the U.S. government and others are not. In any industry, the failure to pay back loans, or make good on one’s end of a deal, can lead to the floor dropping out and financial failure of the individuals and organizations involved. Many financial critics talk about the repayment of student loan debt being used to lend more money to new students applying for financial aid and loans for school.

According to another recent article, “Disaster looms with student loan bankruptcy consideration[i],” the approximate amount of current student debt is $1.3 trillion, with the federal government guaranteeing 90 percent of those student loans. As we reported in our last blog on this issue, “Should Congress move forward with student loan forgiveness in bankruptcy courts,” the average student loan debt is around $30,000 but many more students have more than $100,000 in student loan debt!

Will students consider bankruptcy as part of their financial plan to pay for college and graduate school?

While many optimists believe that students today know the financial and educational challenges ahead of them and those students desire a good credit rating and clean financial record without collections or bankruptcies. However, the best plans in life can be prevented or influenced by considerations beyond our control. In those situations, it might make sense to extend bankruptcy protection to student loans in addition to the other personal and household debts dischargeable under bankruptcy law.

An alternative to bankruptcy, for those concerned about debt, might be one of the many federal student debt relief programs. For example, “The William D. Ford Federal Direct Loan Program was established in 2007 so students can reduce their debt. Students who pursue careers that are deemed to be in the public interest and have relatively low salaries, such as nursing and teaching, can have a portion of their loan debt forgiven.[ii]

Until there is a change in the law and bankruptcy becomes an option for student loan debtors, we can only speculate about what could happen and how many student loan cases are likely to result in bankruptcy. There will be much more debate on this issue in upcoming news stories.

Joseph Wrobel, Ltd. will follow the student loan forgiveness news to keep you informed of your options.

Joseph Wrobel, Ltd. helps people get control of their finances and a fresh start at financial freedom. The firm’s website contains informative videos about financial issues as well as bankruptcy protection for families who want a fresh start. To keep in touch and read about consumer finance news and stories you can Like the firm’s Facebook page and Follow Joseph Wrobel. Ltd. on Twitter. If you need immediate legal assistance, please call Joseph Wrobel, Ltd. by calling (312) 781-0996 to talk to an attorney today.

 

[i] Times Leader, Disaster looms with student loan bankruptcy consideration, by Eileen Godin, Apr. 9, 2015.

[ii] See HNi above.

Should Congress move forward with student loan forgiveness in bankruptcy courts?

Americans are weighted down by unprecedented amounts of student debt. Some reports suggest the amounts of student loans have doubled since 2007. The average amount of student loan debt seems to be about $30,000. Many more Americans have significantly higher debt totals, many exceeding $100,000 for students pursuing professional careers in law, medicine and finance.

Americans have 40 million dollars in student loans totaling 1.3 trillion dollars.

Under the current laws, you may file for bankruptcy and discharge your responsibility to pay mortgage, credit card, auto and consumer debts but not student loans. There are a few very limited exceptions to the rule against student loan discharge in bankruptcy, but they do not apply in almost all cases.

90% of student loans are backed by the federal government and 10% are largely unsecured private loans. Both public and private loans are “student loans” in bankruptcy and are not dischargeable.

President Obama issued a memorandum directing his administration to investigate whether allowing student loan discharge is an important option. If the reports indicate student loan bankruptcy is a good option, Congress could have the opportunity to weigh in and make law allowing student loan forgiveness.

Not everyone wants student loans to be forgiven in bankruptcy cases.

The main lending industry trade association, the Consumer Bankers Association, asserts that overall only three percent of student loans are in “financial distress.” The group also spoke in opposition of including student loans in bankruptcy, stating, “We are working to provide flexible repayment options to keep them from finding themselves in bankruptcy at all.[i]

Likely, the student loan industry would be injured if student loans become dischargeable in bankruptcy because it could drive up the interests rates on student loans, making them even more difficult for people to repay.

The Republican controlled Congress is also likely to not move forward on legislation coming from President Obama’s administration, which could also hurt the chances of student loan forgiveness.

Joseph Wrobel, Ltd. will follow the student loan forgiveness news to keep you informed of your options.

Joseph Wrobel, Ltd. helps people get control of their finances and a fresh start at financial freedom. The firm’s website contains informative videos about financial issues as well as bankruptcy protection for families who want a fresh start. To keep in touch and read about consumer finance news and stories you can Like the firm’s Facebook page and Follow Joseph Wrobel. Ltd. on Twitter. If you need immediate legal assistance, please call Joseph Wrobel, Ltd. by calling (312) 781-0996 to talk to an attorney today.

[i] Wall Street Journal online, White House Floats Bankruptcy Process for Some Student Debt, Mar. 10, 2015.