Many consider student loans to be the next wave of the financial crisis as many young adults are finishing college thousands of dollars in debt but finding limited job opportunities because of the current state of the economy. The Department of Education recently reported a rise in default rates for student loans, to 8.8 percent.
While the U.S. Congress seems to be focusing on troubles felt by students of for-profit colleges, students and graduates throughout Florida are struggling with education loans that may seem unpayable in our current economic climate. As legislators explore changing bankruptcy rules to allow for the discharge of some student loan debt, until a change is actually made in bankruptcy laws, those considering bankruptcy as a way to discharge student loan debt should beware.
Speak with an experienced Orlando bankruptcy attorney before defaulting on your student loans if at all possible. Although bankruptcy laws are designed to give individuals an opportunity for a fresh start, student loans can be very difficult to discharge through bankruptcy.
Student Loans and the U.S. Bankruptcy Code
The U.S. Bankruptcy Code generally categorizes education loans as a non-dischargeable debt. Student loans cannot be canceled through bankruptcy absent a showing of undue hardship. Undue hardship is a difficult legal standard to actually meet, let alone define. Very few bankruptcy filers have been successful in meeting this burden; very few student loans have actually been discharged through bankruptcy.
The courts developed the Brunner Test for determining undue hardship Essentially, a borrower must satisfy each prong of the Brunner test, which requires a showing that:
- He or she cannot maintain a minimum standard of living while paying the loans,
- That their poor financial situation is likely to continue, and
- That they made a good faith effort to repay the loans.
Very few courts have discharged student loan debt through bankruptcy; the undue hardship test is a very difficult burden to meet. Consider the following individuals who were unable to discharge student loan debt through bankruptcy:
Roberta Spence's experience with bankruptcy exemplifies the difficulty of student loan discharge through bankruptcy. A former doctoral student in her 60's, she was working in a low-paying job while battling diabetes and high blood pressure. While a bankruptcy judge initially approved her discharge, an appeals court disagreed, stating "her education was not so outdated that higher paying alternatives would be unreachable."
Garrett Mockler had a similar experience after filing bankruptcy in 2004. He had amassed $40,000 in student loans pursuing a Masters in Fine Arts. His credit card debts were discharged, but the student loans were not.
Federal Student Loans
Federally backed student loans are especially difficult to discharge because they are subsidized by taxpayer money. When a borrower defaults, reimbursement to taxpayers is essentially lost. Americans are already sensitive about government spending as it is, so most taxpayers would not support their taxpayer dollars being spent on free educations when borrowers are able to pay back student loans.
Because of this difficulty, it is important for borrowers to understand how they can manage payments so that they don't fall hopelessly behind or default on their loans. Collection agents can garnish up to 15 percent of a borrower's wages to recover loan payments.
If financial issues hinder your ability to repay your loans, there are options available. If you have student loan debt along with other debt, including credit card debt or a mortgage payment that exceeds the value of your home, a Chapter 7 or Chapter 13 bankruptcy may still be an option. Although you may not be able to discharge the student loan debt, getting rid of other debt may make your student loan payments more affordable.
Some lenders may allow you to defer payments. You may request additional time to make payments, or to delay them for a specific period of time. Deferments are commonly granted for borrowers who are out of work or are experiencing financial hardships.
Lenders may also accommodate a forbearance, allowing loan payments to be delayed, but the time to pay off the loan does not change. For example, a 12 month forbearance on a 120 month repayment period would leave less time to repay the balance, but may allow you to stop paying on your loans for a defined period of time. This would likely lead to higher payments in the interim.
Borrowers in financial distress should contact an Orlando bankruptcy attorney to learn about their options.
