Newburgh Area Bankruptcy Attorneys Examine Student Loans in New York
A bankruptcy filing does not create a “safe harbor” from student loan debt. Although past due tuition owed to an institution is usually dischargeable in bankruptcy, student loans rarely are, particularly when their funding comes from (or is guaranteed by) governmental agencies or non-profit institutions (note: this is the usual type of student loan). However, when the funding comes from private, for-profit lenders there are instances when the student loan, or a portion thereof, can be discharged. A private educational loan is only non-dischargeable if it is a “qualified education loan”, which means that:
- The school attended must be a Title IV accredited school. If the school is not accredited, the loan may be dischargeable. Examples of non-accredited schools might include trade schools, foreign medical schools, courses preparing graduates for the Bar exam, etc.; and
- The amount borrowed for the academic year in question cannot exceed the annual “cost of attendance” for the school. Any portion of the annual loan in excess of these limits may be dischargeable; and
- The borrower must be an “eligible student”, meaning one who is enrolled at least on a half-time basis and is degree seeking; and
- The loan is not a “mixed use” loan. The funds borrowed must be entirely used to pay for qualified higher education expenses.
The one instance where any type of student loan can be discharged in bankruptcy is if the debtor can establish an “undue hardship”, which in our experience is very difficult to do. To meet this threshold a debtor must establish that if forced to repay the student loan he/she will be unable to:
- Maintain a minimal standard of living for the debtor and his dependents.
- This state of affairs will continue for a significant period of time.
- The debtor has made a good faith effort to repay the loan prior to the bankruptcy filing.
It should be noted that the legal fees associated with bringing a Complaint in Bankruptcy Court to obtain a Bankruptcy Court Order discharging student loan debt can be a very high, and the Debtor is responsible for their own legal fees, win or lose The lenders in question are well-funded and generally do not roll over and play nice when confronted with a Dischargeability complaint. However, when dealing with private student loans whose proceeds were paid to a non-accredited school it is possible, in certain circumstances, for a prevailing debtor to get their legal fees paid by the lender. This “tactic” would have to be discussed with our firm in great detail before being employed.
When the government is your student loan creditor, it is usually advisable to enter into a repayment arrangement with them. The government has many collection options available to it, all of which can make your life miserable and none of which become barred by the passage of time (i.e. no statute of limitations defense). The following steps may be taken by the government to recover the outstanding balance due:
- A debtor is liable for all collection costs incurred in collecting the defaulted loan.
- Garnish 15% of your disposable pay each pay period. For government employees an “offset” occurs, and for those employed in the private sector a “garnishment” occurs.
- You may be sued in state or federal court to collect the balance.
- Credit reporting agencies are notified of your default, which can adversely affect your credit rating.
There are some non-bankruptcy “discharge” options available for federal student loans in certain circumstances, many of which have Cancellation of Debt. “COD”) income tax consequences:
The borrower is currently employed in a public service job and has been so employed while having made 120 monthly payments on an eligible loan that is not in default. This has no COD consequences;
- The borrower becomes permanently and totally disabled. This has COD consequences;
- The borrower is unable to complete his program due to the closure of the school. This has COD consequences;
- The student’s eligibility to borrow was falsely certified by the school as a result of identity theft. This has COD consequences;
- The school fails to refund loan proceeds that it owes to the lender, although the amount subject to “discharge” is limited to the portion of the loan which should have been refunded. This has COD consequences;
- Income-driven repayment options, including Income Based Repayment, Pay-As-You-Earn and Income Contingent Repayment Plans. Successfully completing one of these repayment options results in the remaining debt being forgiven after either 20 or 25 years, depending upon the option. All of these repayment options have COD consequences.