Student Loans - Dischargeability Issues
Today, American students owe more than $1.4 trillion in student loan debt, all of which is spread out among about 44 million borrowers. Considering the average class of 2016 graduate had $37,172 in student loan debt, it’s not surprising so many young adults find it hard to get a good running start on life when they’re beginning their careers. It’s almost impossible to achieve the American dream of finding a great job, buying a house, and starting a family when you can barely afford to pay rent on top of your student loan payments. Because so many students have fallen behind, some often wonder whether or not it’s possible to discharge their loans entirely.
Under normal circumstances, many loans are not eligible for discharge when people file for Chapter 7 or chapter 13 bankruptcy. However, student loans are not entitled to priority status, or a preferential payment status by the chapter 7 or chapter 13 Trustee. Other loans, such as income taxes that were supposed to be filed less than three years before the filing of the debtor’s bankruptcy petition, get such a preferred status. In order for student loans to be discharged, the debtor has to file an adversarial complaint with the goal of procuring a favorable final judgment from the bankruptcy court.
However, the problem lies in the way the courts have historically interpreted the standard the debtor needed to prove “that there is no reasonable likelihood in the foreseeable future of the debtor being able to pay back these loans.” Case law historically almost universally went against debtors seeking to have their student loans discharged. This isn’t surprising, considering how much lower student loans historically used to be.
From 2007 to 2017 alone, public universities increased their fees by a total of 27%. In 1973, tuition for one year at a private college averaged $9,846, while public schools were just $2,175. After that, college costs began to increase at a rate much higher and faster than inflation. Since the mid-1970s, college prices have risen 5% to 6% above inflation. In 2003, average college costs rose 14%. Because of their student loan debt, many students have decided to delay marriage, having children, and buying a home until the majority of their debt has been paid, a process that takes years to accomplish.
There were discussions during the last couple of years during the Obama administration about issuing executive orders to the attorney general’s office, directing the AG’s office to make it less difficult for debtors to have their student loans discharged. For example, significantly lessen the AG’s historical rigorous opposition to debtor’s actions filed with The Bankruptcy Court seeking a judgment finding their student loans to be dischargeable. Other conversations have taken place within Congress to pass legislation making it easier for bankrupt debtors to have private student loans discharged. For example, not holding the debtors to the same high standards to prove a debt’s eligibility to be discharged as is the case with government-backed loans. Regardless as to the U.S. Congress’ failure to pass any specific laws easing the dischargability of student loans and/or the Obama administration’s issuance of any directives concerning same to the Atty. Gen.’s office, the fact is the climate has now changed throughout the country, including in the second and third circuits (which includes New York and New Jersey) and student loan dischargeability complaints are being routinely settled around the country on much more reasonable terms than in the past. Dischargeability complaints that do go all the way to trial our being W ON by Debtors about as frequently as they are being lost.
Over the past few years, student loans have become more than a minor hassle to current students and graduates. Student loans have become the albatross around the necks of many U.S. citizens. If you find yourself in this situation, you could be under similar financial and emotional stress. Whatever your case, Marc G. Alster and his legal team are always available to help guide you through the financial process related to your student loans. He has been recognized by many prestigious legal associations and offers more than 20 years of legal experience. You can rest assured your financial troubles are in good hands. Give his office a call today at for your free initial consultation.
Can I Discharge My Student Loans in Bankruptcy?
Unfortunately, student loans are not considered general unsecured debts subject to being discharged at the successful conclusion of a Chapter 7 or 13 bankruptcy case. Under the U.S. Bankruptcy Code, in order for debtors to have their federally backed or private student loans discharged, debtors must prove that having to pay back their subject student loan debt would cause them to suffer an "undue hardship". Bankruptcy Courts in New York and New Jersey have been interpreting the "undue hardship" standard to require Chapter 7 or 13 debtors to prove that "there is no reasonable likelihood of the debtor being able to pay back the student loan(s) in the foreseeable future" in order for the Court to rule that the debtors' federally backed or private student loans are dischargeable. In the U.S. Bankruptcy Court for the Districts of New Jersey and New York this standard has not been easy to meet. But see other article in this section of our website as to how filing for Chapter 13 relief might afford help to debtors when student loan debt is not otherwise dischargeable.
Procedure
In order for student loans to be discharged, the debtor has to file an adversarial complaint with The U.S. Bankruptcy Court, which basically amounts to a separate lawsuit within the debtor's bankruptcy case. The goal of the debtor's said adversarial complaint would be to procure the Bankruptcy Court's final judgment or court order finding the debtor to have met the above described legal standard necessary for the Bankruptcy Court to rule that the debtor's student loans, which are the subject of the Adversarial Complaint, are dischargeable. In determining whether the above referred to legal standard have been satisfied by debtors, Bankruptcy Courts in the U.S. 2nd and 3rd Circuits have set out the following specific criteria to be considered in making its determination:
Will repaying your student loans prevent you from maintaining a minimal standard of living?
Will it be difficult for you to maintain your minimal standard of living over the repayment period?
Did you make an effort to repay the loan before filing bankruptcy?
Bankruptcy Courts have historically interpreted the above referred to standard and criteria the debtor needed to meet in order for them to find that a debtor's student loans to be dischargeable almost universally against debtors. In recent years, however, the climate has changed throughout most of the country, including in The U.S. 2nd and 3rd Circuits where The New York and New Jersey Bankruptcy Courts sit). Student loan, dischargeability complaints are being routinely settled around the country on much more reasonable terms than in the past. Nevertheless, in order to prove their good faith, one of the things debtors carrying a significant amount of federally backed student loans should do prior to their filing an adversarial complaint seeking the discharge of their student loans, is to register all their federally backed loans with the National Student Loan Data Center ("NSLC").
There have been many "conversations" within Congress over the last several years about passing legislation to make it easier for bankrupt debtors to discharge their student loans and, in particular, to make private student loans dischargeable along with a debtor's other general unsecured creditors. Dischargeability complaints that do go all the way to trial our being won by Debtors about as frequently as they are being lost, however, it can be a very expensive proposition for a debtor to pay an experienced bankruptcy practitioner to prosecute a student loan, dischargeability complaint all the way through trial, not to mention the possibility of incurring significantly greater legal fees if it is necessary to defend against or take an appeal from one or more of the Bankruptcy Court's rulings.
Over the past several decades, student loan debt has become an albatross around the necks of many U.S. citizens, causing untold financial and emotional stress. Even if you are unable to fully discharge your student loan(s) debt by filing for bankruptcy protection, there are many other potential options for dealing with student loans that are in default, including applying for deferments, forbearances and sometimes even cancellations. See other article in this website entitled "Chapter 13 Can Help When Student Loans Are Not Dischargeable". In particular, debtors who cannot afford their monthly federally backed student loans debt payments have numerous remedies available to them under the US Department of Education's several income-based and income contingent repayment plans.
Marc G. Alster and his legal team are always available to help guide you through the financial process related to your student loans. Mr. Alster offers approximately 30 years of legal experience; you can rest assured you will be provided with sound advice and that your financial troubles are in good hands. Give his office a call today at for your free initial consultation. If you are dealing with student loan debts and are considering filing bankruptcy, please contact the Law Offices Of Marc G. Alster to discuss your options with a Bergen County bankruptcy attorney.
From his office in Hackensack, New Jersey, Attorney Alster's services extend throughout the state of New Jersey, as well as New York. Some areas he serves in New Jersey are Passaic County, Bergen County, Hudson County, Essex County, and more; in New York, he serves Rockland County, Queens, and the Bronx.