Do You Have What It Takes to Bankrupt Your Student Loans?

In my last blog, I mentioned that student loans cannot be discharged in bankruptcy. That is true. Yes, if you want to file bankruptcy like a personal consumer bankruptcy you have two options, a chapter 7 personal bankruptcy, and a chapter 13 also called the “wage earners plan”.

Under a chapter 13 you agree to a “re-payment plan” as the US Courts Website describes it “A chapter 13 bankruptcy is also called a wage earner’s plan. It enables individuals with regular income to develop a plan to repay all or part of their debts. Under this chapter, debtors propose a repayment plan to make installments to creditors over three to five years. If the debtor’s current monthly income is less than the applicable state median, the plan will be for three years unless the court approves a longer period “for cause.” (1) If the debtor’s current monthly income is greater than the applicable state median, the plan generally must be for five years. In no case may a plan provide for payments over a period longer than five years. 11 U.S.C. § 1322(d). During this time the law forbids creditors from starting or continuing collection efforts.

So let’s say you have maxed out all your credit cards, you owe for a huge cell phone bill, are behind on payments for the Big Screen TV, your appliances, that 1st apartment’s furniture, and you owe the doctor’s and hospital for that newborn baby. And on top of it all you owe on those student loans, and every day and night the collection companies keep your I-phone ringing out of your empty pocket!

At this point you are thinking what in the world can I do? May I suggest that you first try and get some debt counseling? But please, seek out local agencies that offer “free” (and I mean free!) help. Many local communities have services available in the form of personal intervention or some type of classes.

Here in my location, there are several agencies who provide counseling and information. Prior to filing my bankruptcy, I called and made an appointment with Northern Virginia Legal Services. As part of their services, I attended a group where an attorney discussed filing bankruptcy. In fact, that agency even will assist debtors who cannot afford an attorney with all that is required to file and succeed in bankruptcy for a fixed-reduced fee.

In my situation, I went with the need to get information on filing bankruptcy and how I could go about including my student loans. I knew there was an “exception” and I wanted to get a few answers about how to use that exception and get my $ 130,000.00 student loan debt discharged by the US Bankruptcy Court.

As the attorney went about describing the different chapters of bankruptcy and the types of debt that can be discharged, she made the statement “most unsecured debts can be written off in bankruptcy, except student loans” (I paraphrased her statement – but the message was clear), she like most lawyers will tell you that you CANNOT discharge your student loans by filing bankruptcy!

While I was tempted to speak up, I didn’t. However, within a few minutes another attendee in that meeting, asked about their student loan debt. Again paraphrasing the lawyer: “I am sorry but student loans are not dischargeable under normal circumstances” Noting the frustration of that person and a couple of others, she went on to say, “student loans may be dischargeable under what is called ‘undue hardship’ but it is very difficult and we cannot help you with that, in fact I (personally), have never seen anyone get their student loans discharged”.

Again I was tempted to speak up, but I held my tongue. But then when the meeting was over, I approached the lawyer and told her my name, age and the fact that I was in the middle of filing my Adversary Proceeding under the undue hardship clause to seek a discharge on my student loan debt of $ 130k which was over 27 years old. I said I had filed chapter 7’s twice before in my life and this time I am going to attempt to get my loans discharged. She stated “well we cannot help you, we do not have the resources for that, and good luck”

So there I was – being told no one could help me – AGAIN! I had tried several avenues for help, every lawyer I contacted said they could not help – and I would hear the closing words, “I wish you luck with that”.

Fortunately, I had done my homework prior to seeking legal assistance. I had a pretty good idea that what I was hearing and going to hear from the legal eagles was what I expected; and that is they either one, do not know much about discharging student loan debts, or two they know that it can be a long and expensive process, and one which they want no part of.

You see, I had studied and researched the subject. Like in my previous blog, I found hundreds of articles about the subject, then I found keywords and phrases which helped to uncover bankruptcy cases where debtors had student loans and filed for discharge under the “exceptions” clause I learned to know as 11 U.S.C. §523(a)(8).

Yes Virginia, there is a Santa Clause!

Let me describe as best I can, what you need to know about 11 U.S.C. §523. As I and many lawyers have said you cannot discharge student loans in bankruptcy. And we are right, up to a point. That point being “Unless”. As the old saying goes there is an exception to everything!

The “exception” is spelled out in the US Bankruptcy Code within Section 727. Bankruptcy generally is available to individuals and businesses that are insolvent and need a “fresh start”, and as far as history goes, bankruptcy goes back thousands of years. When the debtor’s prisons became filled up, the ruling party began granting bankruptcies (short version).

Under §727, the bankruptcy court named several types of debts that would not be allowed to be discharged, and the reasons to not allow such relief. (Bear in mind §727 is a section within the Chapter 7 bankruptcy rules). So in a chapter 7 bankruptcy we see the following rules:
(a) The court shall grant the debtor a discharge, unless – (1) the debtor is not an individual; (2) the debtor, with intent to hinder, delay, or defraud a creditor or an officer of the estate charged with custody of property under this title, has transferred, removed, destroyed, mutilated, or concealed, or has permitted to be transferred, removed, destroyed, mutilated, or concealed – (A) property of the debtor, within one year before the date of the filing of the petition; or (B) property of the estate, after the date of the filing of the petition; (3) the debtor has concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information, including books, documents, records, and papers, from which the debtor’s financial condition or business transactions might be ascertained, unless such act or failure to act was justified under all of the circumstances of the case; (4) the debtor knowingly and fraudulently, in or in connection with the case – (A) made a false oath or account; (B) presented or used a false claim; (C) gave, offered, received, or attempted to obtain money, property, or advantage, or a promise of money, property, or advantage, for acting or forbearing to act; or (D) withheld from an officer of the estate entitled to possession under this title, any recorded information, including books, documents, records, and papers, relating to the debtor’s property or financial affairs; (5) the debtor has failed to explain satisfactorily, before determination of denial of discharge under this paragraph, any loss of assets or deficiency of assets to meet the debtor’s liabilities; (6) the debtor has refused, in the case – (A) to obey any lawful order of the court, other than an order to respond to a material question or to testify; (B) on the ground of privilege against self-incrimination, to respond to a material question approved by the court or to testify, after the debtor has been granted immunity with respect to the matter concerning which such privilege was invoked; or (C) on a ground other than the properly invoked privilege against self-incrimination, to respond to a material question approved by the court or to testify; (7) the debtor has committed any act specified in paragraph (2), (3), (4), (5), or (6) of this subsection, on or within one year before the date of the filing of the petition, or during the case, in connection with another case, under this title or under the Bankruptcy Act, concerning an insider; (8) the debtor has been granted a discharge under this section, under section 1141 of this title, or under section 14, 371, or 476 of the Bankruptcy Act, in a case commenced within 8 years before the date of the filing of the petition; (9) the debtor has been granted a discharge under section 1228 or 1328 of this title, or under section 660 or 661 of the Bankruptcy Act, in a case commenced within six years before the date of the filing of the petition, unless payments under the plan in such case totaled at least – (A) 100 percent of the allowed unsecured claims in such case; or (B)(i) 70 percent of such claims; and (ii) the plan was proposed by the debtor in good faith, and was the debtor’s best effort; (10) the court approves a written waiver of discharge executed by the debtor after the order for relief under this chapter; (11) after filing the petition, the debtor failed to complete an instructional course concerning personal financial management described in section 111, except that this paragraph shall not apply with respect to a debtor who is a person described in section 109(h)(4) or who resides in a district for which the United States trustee (or the bankruptcy administrator, if any) determines that the approved instructional courses are not adequate to service the additional individuals who would otherwise be required to complete such instructional courses under this section (The United States trustee (or the bankruptcy administrator, if any) who makes a determination described in this paragraph shall review such determination not later than 1 year after the date of such determination, and not less frequently than annually thereafter.); or (12) the court after notice and a hearing held not more than 10 days before the date of the entry of the order granting the discharge finds that there is reasonable cause to believe that – (A) section 522(q)(1) may be applicable to the debtor; and (B) there is pending any proceeding in which the debtor may be found guilty of a felony of the kind described in section 522(q)(1)(A) or liable for a debt of the kind described in section 522(q)(1)(B).

WOW! Really? Yes! You do need to know most of what is here. It does get better!

What this section is basically saying is that in order to file a chapter 7 (in this case) you must be an individual (not a business etc.) and that you are not some deviant criminal with intentions of defrauding the court in pursuit of a discharge. (simplified it for me anyway)

All right moving down a bit in §727 we have this:
(b) Except as provided in section 523 of this title, a discharge under subsection (a) of this section discharges the debtor from all debt –

See more online here.

OK… section 727 continues beyond what I pasted here, but I wanted to show a reference to section 523 that appears in section 727. And §523 is where I want to move to next, as it is the relevant section that described the “exceptions to discharge-student loans” And which is titled: “11 U.S.C. § 523 : US Code – Section 523: Exceptions to discharge.

Again we see the word “EXCEPTION”. So as not to confuse you I will limit the context of the rules within §523 and present the relevant subsections that you need to memorize.

The next step was to search for 11 USC 523 – Which I did and will detail below.

Here we are. Under the first subtitle, namely small letter a shown as “(a)” reads…
(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt

There again we see “does not discharge…” And again we see several subparagraphs under (a) that describe what is not dischargeable — taxes, fraud, etc, etc.

But as you search down through all of this, you get to a numbered subparagraph number 8 shown as (8). This is where I derived the rule 11 U.S.C. §523(a)(8). What I will refer to as the Undue Hardship Provision or Undue Hardship Clause.

Subparagraph (8) is the educational loan paragraph of the bankruptcy code. This code basically forbids the discharge of student loans….

Here’s what (8) reads : (8) unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents, for – (A)(i) an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or (ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend; or (B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual;

Subparagraph (8) is a bit confusing… because the wording is legal speak and actually reads “backwards” in my opinion. The language here is saying “unless there is undue hardship, then an educational benefit overpayment (don’t dwell on the word overpayment here) or LOAN MADE, INSURED, or GUARANTEED By a GOVERNMENTAL unit or NONPROFIT INSTITUTION OR (loans) MADE UNDER any program FUNDED in whole or part BY A GOVERNMENTAL unit or nonprofit institution, etc., etc., IS EXCEPTED FROM DISCHARGE! and “EXCEPTED FROM” means NOT ALLOWED!

Plain and simple sub paragraph (8) is stating that Student Loans are NOT Dischargeable in Bankruptcy, “unless excepting such debt would impose an undue hardship”

A simpler way to understand this is to put it this way… Under Chapter 7, section 727, (a) The court shall grant the debtor a discharge (of ALL debts that are not listed as “exceptions”)… Then all the exceptions are listed, including student loan or debts for education. Here that exception is spelled out in subparagraph (b):

(b) Except as provided in section 523 of this title (which prohibits educational debts from being discharged), a discharge under subsection (a) of this section discharges the debtor from all debt … The exception for allowing student loan debts is described within section 523 in the introduction as subparagraph (8) (8) unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents

OK there it is… “the unless” did you catch it? And the unless, is “imposing undue hardship”.

I think this is a good place to stop for today? Next time I will try and detail what the courts have defined as “imposing undue hardship”.

Until then, thanks for reading, and be sure signup for email notifications, and feel free to ask questions, and as always your comments are welcomed!

Best regards, Bob

This article by Bob Preston first appeared on Undue Hardship – Poverty Required and was distributed by the Personal Finance Syndication Network.

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