Tag: student loans

Bankruptcy Court Grants Partial Discharge of Student Loan

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In August, 2019, a Bankruptcy Court in Oregon granted a partial discharge of a student loan owed by an attorney who represents indigent criminal defendants. The attorney paid her student loans for 11 years. Notwithstanding, she owed about $198,000 to ECMC on federal loans, and over $50,000 on private loans sold to National Collegiate Student Loan Trusts. The Debtor defaulted on the NCSLT loans. The trusts accelerated the loans and filed suit.

The Debtor filed under Chapter 7 and then filed an adversary proceeding to discharge the student loans. The Debtor settled with ECMC to allow an income based repayment under REPAYE. Based on her income, the monthly payment to ECMC was set initially at $479 per month. She went to trial against the trusts.

To obtain a discharge of a student loan debt, a debtor must show that excepting the debt from discharge would impose an undue hardship on the debtor and the debtor’s dependents. Undue hardship is not defined in the Bankruptcy Code. In determining whether an undue hardship existed, Oregon court applied the Brunner test. (It should be noted that bankruptcy courts in New Jersey also apply the Brunner test.)

Under Brunner, to show undue hardship, a debtor must demonstrate that, given current income and expenses, she cannot maintain a minimum standard of living if the student loans were to be paid according to their terms; that this situation is likely to persist for a significant portion of the repayment period; and the debtor has made a good faith effort to repay the loan. In many cases, the second prong of the test (situation likely to persist) creates difficult proof problems for the college educated, younger debtor without health issues.

The debtor’s schedules indicated negative income of $474. However, the Court found that some of her expenses were not reasonable and were backed out. Given the monthly payment to ECMC, however, the Court found that the Debtor could not maintain a minimal standard of living if she had to pay the NCSLT loans which could come to over $900 per month based on the Oregon wage garnishment statute. That got the debtor over the first prong of Brunner. In regard to the second prong, the court found that the debtor was in a niche practice and her opportunity to generate more income over the life of the loans was not realistic Moreover, if her income increased, her monthly payment to ECMC would increase. I believe that judge conducted the proper analysis of the second prong; however, many courts would have looked at her age and law degree, and concluded reflexively that she could have sufficient future earning power to make the payments.

The Court also found that the debtor acted in good faith. 11 years of payments coupled with the fact that the trusts were under no requirement to give the debtor an income based repayment plan that she could afford.

The Court found that the debtor proved an undue hardship under the Brunner test. However, the Court did not discharge the NCSLT loans in total. Because some of her expenses could be cut, and there was a likelihood that her income could increase somewhat in the future, the Court discharged roughly $35,000. However, the Court said that if the debtor trimmed her expenses, she could afford to repay $16,500 of the NCSLT loans at 0% interest.

I believe this is a good result based on a thorough analysis by the judge. However, we are talking about an unpublished opinion out of Oregon. NJ bankruptcy judges are not bound by this opinion but should consider the thoughtful analysis of that court.

The Costs and Benefits of College

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Back in 2014, a study by PayScale indicated that certain degrees, such a engineering, pretty much insure that the graduate will earn at least 500K more over a 20 year period than someone who did not attend college.  At the same time, an arts or humanities degree from a lower tiered college may translate into a six figure deficit vis-a-vis high school graduates.

Moreover, a study by McKinsey, highlighted in The Economist, pointed out that in this less
than stellar pre 2016 job market, 42% of then recent graduates were in jobs that did not require a 4 year degree.
When I attended a liberal arts college, tuition, room and board amounted to less than $3500 per year.  My father’s union paid for half.  My goal was to be a well rounded student who could think and communicate.  After college, I would figure out what I wanted to do.
I had that luxury not because my parents were wealthy but because college and grad school were relatively cheap.  Students today do not have that luxury.  The College Board published data that indicates for 2016-17, the average tuition, room and board at a private college was in excess of $45,000 per year.  For in-state at public colleges, $21,000.
So, if you follow the advice of PayScale, you become an engineer or perhaps a computer major.  But not everyone has the aptitude or inclination to be an engineer or IT wiz.
What to do?  Be smart and realistic.   If you are able to get into an Ivy League school, or another top tier school like Stanford or MIT, it may be wise to go “all in”.  But not to be a Latin major.    If you are a B student with median SAT’s, you have to ask,  is it worth spending 50K per year to go to a second tier private college?  Think about it.  Maybe a state university as an “in state” student is money better spent.
Or, look into a community college for the first two years.  You can test your abilities and see what you like at a very reasonable price.  If you do well, you can transfer into a 4 year college.  By going this route, you still get your degree but you may wind up saving 40% of the expense.
In addition, go beyond applying for financial aid from your school.  There are many  financial aid opportunities through local clubs or civic organizations.  You can find them if you are willing to do your homework.   For example, our local Rotary awards scholarships to about 12 students per year.
Finally, you have to be on top of your student loans once you graduate.  The last thing you want to do is fall into default.  More than that, you would want to be pro-active in finding the right repayment plan which will allow you to pay your student loans and not live in poverty.  Do not shy away from seeking expert help in this area.  It may be money well spent.

Student Loans and Bankruptcy- Another Perspective

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Frequently, I have someone call me to inquire about bankruptcy because they cannot afford to pay their student loan debt.  I explain to them that bankruptcy discharges student loans only if the debtor can demonstrate to the court what is called an “undue hardship”.  While under the right circumstances, a debtor can prove “undue hardship”, it is a very high hurdle for most prospective debtors, and expensive  Not only do you have to pay for the bankruptcy, you are required to file an adversary proceeding; that is, a lawsuit within the bankruptcy.  To the extent that the lender opposes the discharge, this means all the elements of litigation- pleadings, discovery, court conferences, motions and trial.  It adds up.

However, that does not mean that bankruptcy cannot be part of a strategy to deal with your student loan debt.  Just as the average homeowner is not going to get out of paying her mortgage, the average student loan debtor is not going to be able to immediately walk away from her student loan debt.  But, you can take steps to make the payments affordable so that you are not sued (if private loan) or subject to an administrative garnishment or social security intercept (if a federal loan).

How can bankruptcy help?  Well, lets say you have $100,000 in student debt and make about $50,000 per year.  You are single with no dependents.  Your rent is high because rents are high in northern  NJ.  Your withholding taxes take 20-25% of your gross income.  Utilities, cable, phone, food, car loan or lease and insurance,an occasional night out (the basics).  Your budget is tight so you used the credit cards they sent you.

So you have $30,000 of credit card debt, about $5,000 of medical expenses that the insurance did not cover. Besides the basics, you are looking at about $500 in monthly payments for credit cards (just above minimums) the hospital (so they don’t sue you).  And then you have to pay your student loans.

A standard repayment in this example is over $1000 per month. But  Income Based Repayment ( IBR) and  REPAYE are less than half that.  Getting close.  If somehow, you could get rid of some of that non-school loan debt, you might be in a position to afford the student loan debt.

A Chapter 7 bankruptcy could discharge the credit card and medical debts.  That would free up over $500 per month.  More importantly, those underlying debt are discharged.  Gone forever.

When you come to Kevin Hanly, Esq. LLC for a student loan analysis, we look at your entire financial picture to arrive at a strategy to make your student loan debt more affordable.  Most times that includes an income based repayment plan. Sometimes, it includes considering and maybe filing bankruptcy.

To get a better idea how bankruptcy works, you can check my bankruptcy website and blog at bankruptcy.kevinhanlylaw.com.

Straight Talk

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It is spring break time.  So, you can expect to see stories about young people going to Florida, the Caribbean or Mexico to party.  Nothing new.  However, this year, there have been a slew of stories about students supposedly using their student loan money to fund the party.  A recent Forbes article by Kate Ashford stated that a recent poll of students indicated that 30.6% of students stated that they are using student loan money to help pay for spring break this year.

Why would students do that?  An Investor Business Daily editorial indicated that just under one-half of millennials believe that their student loans will be forgiven.  After all, Bernie Sanders advocated for forgiving student loans.

So, if the loan is forgiven, who is left with the bill?  The taxpayer.  Sometimes that approach may have some validity on a societal basis if the beneficiary is truly needy.  However, the bottomline is that people with a college degree or higher make significantly more money than people with only a high school degree.  So, in effect, the student loan borrowers looking for blanket amnesty are expecting less fortunate people to pay their debt.  Not going to work, especially considering the outcome of the election.

Lets get real.  Student debt is over a trillion dollars, and up 17% since 2013.  Student loan debt is rising at a rate 3 times inflation, and it is not getting better.  Moreover, on federal loans, the Department of Education has many nasty tools to insure that they are going to collect their money.  The loan is hardly ever dischargeable in bankruptcy, and the DOE can garnish your wages, grab part of your social security check and your full tax refund without even going to court.  Private lenders got all the benefits of non-dischargeability without having to make concessions to borrowers on repayment plans geared to income (Congress really dropped the ball on this one).   Borrowers are not going to get a political bailout, and face a daunting task if they default on either a federal, state or private loans.

Who do you turn to?  Your friendly servicer.  According to the government, the servicers are there to advise the student about the best way to deal with their students loans.  But many just push you into forbearances. In the short run, that may forestall payments.  However, the accrued interest is just added to your principal debt.  So, you leave forbearance owing more than you entered.  In January, the CFPB filed a 66 page complaint against Navient alleging, among other things, that Navient pushed federal loan borrowers with long term employment issues into forbearances instead of income driven plans.

Your student debt is not going to go away miraculously.  You are going to have to deal with it.  We are here to help.