Student Loans and Bankruptcy | Can I Discharge Them?

Let’s set the record straight. Here is my take:

Video Transcription of Student Loans and Bankruptcy | Can I Discharge Them?

Hi, Hector Quiroga here with Quiroga Law Office. Today, I’d like to talk to you about student loans and bankruptcy. I get the question often, “Are student loans dischargeable in bankruptcy? What can we do here in Spokane County or the Eastern District of Washington through our bankruptcy courts to address the problems with student loans? Is bankruptcy really an option?”

Well, bankruptcy is in fact an option. Student loans are dischargeable, meaning, lawyers, many other people, information online will tell you that student loans are not dischargeable.  That’s really a summary. Student loans are dischargeable, they’re just very hard to discharge.
The laws allow for a presumption that a student loan is non-dischargeable. So when we file your schedules and we list a student loan on your petition and schedules, that loan is presumed to be non-dischargeable unless you make a special filing, a special inquiry as to whether or not the court would like to discharge that loan. So, you can do it.

So how do you make that special request? Well, there’s a process, it’s called an Adversary Proceeding. An Adversary Proceeding very much acts like litigation, a different case within the bankruptcy. So when you file for bankruptcy, I like to think of your filing schedules, you’re filing schedule A to J, so A B C D and the whole way down. You’re filing a petition, a creditor matrix, financial statement, financial, you have to file a wage directive or, I’m sorry, you have to file pay stubs, what is called a payment advice. You have to file a statement of financial affairs; among other things. So, even if you file all of that, that really acts kind of like filing taxes. You just file a bunch of forms and that’s a petition. You just get the forms to go and the court will tell you whether or not this is dischargeable or not.

The challenge comes in the form of an Adversary Proceeding. So you have the underlying case underneath, kind of like filing taxes you use forms and then a case on top of it which is the Adversary.  And it is the Adversary that challenges the student loans. What is it? You have to the other side like any lawsuit and this is going to open it to discovery, positions, the requests for productions, interrogatories, requests for admissions, etc. So, it’s very expensive because into open battle basically, open litigation to discharge these things. So number one, the cost is almost cost prohibitive so we don’t see a lot of debtors challenging these things because it’s going to cost $15,000, $20,000 plus, just to get to a dischargable debt. So, it would be worth it to someone with excessive student loan debt, $150,000 plus, now less than that maybe also but part of the issue is the next step which is you have to show undue hardship.

Now there’s a lot of talk about what undue hardship is, what it means. This doesn’t really sound like what it is. Most people think, “Oh, well I can’t pay this. My minimum payments are more than what I bring in a month so obviously there’s an undue hardship.” Unfortunately, that isn’t it.  Undue hardship is extreme hardship. I mean, it’s something that makes you so ill that you can’t get a job, you can’t possibly work even If you had a job you couldn’t possibly work. And the case law seems to support that. So, now there have been new changes in the law, it appears that we’re moving away from this, that maybe we’re going to lower the standard a little bit because, in essence, anybody can earn money, you can always win the lottery. Is that really a standard? If anyone can do it then let’s just say we can’t discharge the student loans anyway.

So that’s one of the biggest hurdles is that we trying to get to show that your situation is such that you just can’t possibly get a job. It’s not just financial but there’s something else that will impede to you to be able to have gainful employment. The second thing is that you have to show good faith. You can’t graduate and in two months, file bankruptcy, and try to discharge your student loans. You have to show good faith, you have show that you tried to find a job, that you have tried to get employment, that you have some payments, that you’ve used all of your deferments, all of your forbearances, that you’ve tried to fix the problem and you just can’t. Now, this is a good faith requirement and it’s used against debtors all the time. Particularly under the federal loans that are other solutions under the William D. Ford plan or repayment plan.

Now there are a few ways, there’s the income sensitive plan, you have to apply for these and be turned down. You can’t just file bankruptcy and say I can’t pay you because one of the defenses we go over is, “Well, we have this great program here and this great program here is going to help you pay your student loans and you haven’t even applied for it. So, since you haven’t applied for it, it doesn’t work.” Well, that’s just it. So, to answer the question, “Is bankruptcy an option for student loans?” It can be. It’s pretty expensive. You can file it in adversary.

There are two more things that you can do through a bankruptcy to help you with student loans. One is you can do a Chapter 13. It’s a restructuring of your debt and you can force the payments into the Chapter 13 plan and it’s going to allow you to pay with what disposable income you have versus what they are actually asking you and sometimes it’s a lot less.  So, a plan can do it.
The problem is that it takes 3 to 5 years and at the end of 5 years you still owe the loan so you may have to do another 13, or whatever, to be able to see where you are now. Obviously, that’s going put you in a long term bankruptcy state but sometimes with so many people graduating with massive amounts of debts, that’s kind of what we’re seeing in our county, okay?

The last option that I mentioned, instead of Chapter 13, is a Chapter 11. Debtors can actually file Chapter 11, this is not just for businesses. A Chapter 11 plan is pretty expensive, and it does require quite a bit of work but it’s long term. You can have this 10 year plan, so it’s going to help you force those companies into negotiating with you and maybe coming to an agreement. So those are the three options. Through bankruptcy it can give you a sort of reprieve from student loans. Yes. Are they dischargeable? Yes, but very difficult.

Hector Quiroga with the Quiroga Law Office. If you have any questions about bankruptcy or student loans or anything related to bankruptcy here in the Eastern District of Washington, particularly in Spokane, give me a call 509-927-3840.

Student Loans and Bankruptcy – Can I Discharge Them? Copyrighted Material of the Quiroga Law Office, PLLC