Student Loans - Dischargeability Issues
BACKGROUND
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.
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. 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.
In the preceding years, there have been many "conversations" within Congress about passing legislation to make it easier for bankrupt debtors to discharge their federal and state student loans. There has been specific debate, in particular, about making private student loans dischargeable pursuant to the same or similar standards that debtors' other general unsecured debts are dischargeable. While no legislation has been passed as of date, for the reasons indicated below it has become much easier and less expensive for good faith, debtors to reach a settlement with the Department of Education and US attorney general's office through the bankruptcy process pursuant to which federal student loan debt is either completely or partially discharged. See other article in the Student Loan Obligation section of this website entitled "US Attorney Gen.'s New Policies & signed Guidelines Concerning the Dischargeability of Federal Student Loans in Bankruptcy".
Even if you are unable to fully discharge your student loan(s) debt by filing for bankruptcy protection, keep in mind there are other potential options for dealing with student loans that are in default, including applying for deferments, forbearances, and sometimes even cancellation. Debtors who cannot afford their monthly federally backed student loan payments can still apply for relief by qualifying for the US Department of Education's income-based repayment plan.
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, 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" 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 historically not been easy to meet. Most Bankruptcy Courts historically ruled against debtors seeking to have their student loans discharged. This may have been the result of the significantly lower balances student loan debtors historically owed in comparison to the average balances student loan debtors are carrying today. However, in recent years the climate has been changing - see other article in the Student Loan Obligation section of this website entitled "US Attorney Gen.'s New Policies & signed Guidelines Concerning the Dischargeability of Federal Student Loans in Bankruptcy".
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 for bankruptcy?
As indicated earlier, historically speaking, it has been very hard for debtors to meet the above-referred-to legal standard needed for debtors to have their federal student loans discharged by the Bankruptcy Court. In recent years, however, the climate has changed throughout the country, including in the U.S. 2nd and 3rd Circuit Courts (which include all of New York and New Jersey). Student loan, dischargeability complaints are being routinely settled around the country, including in New York and New Jersey, on much more reasonable terms than in the past. This is no doubt the result of Executive orders issued during the Biden administration, which directed the AG's office to make it less difficult for debtors to have their Federal (government-backed) student loans discharged through bankruptcy. To put it another way, the guidelines which the US Atty. Gen.'s office historically followed when it was opposing debtors' adversarial complaints seeking to have their Federal student loans discharged, have been significantly relaxed since 2022.
While dischargeability complaints that do go all the way to trial are being won by Debtors about as frequently as they are being lost, 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's necessary to defend against or take an appeal from one or more of the Bankruptcy Court's rulings. While still expensive, relatively speaking, the current US Attorney General guidelines have rendered it significantly less expensive in most cases for debtors to prosecute an adversarial action seeking to have their federal student loans discharged by the Bankruptcy Court. It is always helpful for debtors who carry a significant amount of federally backed student loans to print out their National Student Loan Data System's report ("NSLDS") before filing an adversarial complaint seeking the discharge of their federal student loans. See the "NSLDS" tab in the Student Loan Obligation section of our website.
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 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.