There are many strategies on how to deal with Student Loans in Bankruptcy. One of them is to try to file an Adversary Complaint to try to discharge the loans, based on the “undue hardship” standard. (the “Bruner” standard) Courts have had varying interpretations, and, in recent years, there have been some streamlined procedures. However, that standard proves to be difficult if the Debtor is still working. Depending on the Federal Court district, there have been some cracks, but the standard is still difficult to prove.
Another way to handle Student Loans in Bankruptcy is to file Chapter 13, and force the Student Lender to take whatever payment that the Debtor can afford, based on the Bankruptcy Means Test and Budget. This is especially helpful if the Student Lender is demanding payments that the Debtor cannot afford. Once you file a Chapter 13 Bankruptcy, the creditors must all stop collection activities and wait their turn for payments.
Back in 2005, I had a client who already filed a Chapter 13 case, which was dismissed for nonpayment. She was struggling, but as soon as her case was dismissed, the U.S. Attorney started garnishing her wages, at an amount she could not afford. She went to law school, then medical school, and ultimately worked as a social worker for the State of Illinois. Not only did she have Student Loans through the U.S. Department of Education, but she also had a special kind of loan that was subsequently discontinued, from the 1990’s, called HEAL loans. The standard to discharge HEAL loans is even harder, requiring that the loan be “unconscionable”. The total amount of student loan debt alone was approximately $200,000.00.
So, I helped her file Chapter 13 Bankruptcy, for a 5-year plan, to bring the payments to a lower amount that she could afford. The disadvantage to the Chapter 13 plan is that all interest on the loans continues to accrue, so the balance ended up actually increasing. She ended up filing successive Chapter 13 cases in 2011, 2015, and 2019, either coming close to, or finishing, each plan. But, because she could not discharge her Student Loan Debt, she had to file Chapter 13, because the wage garnishment would have been more than she could afford. She still was working full-time, so the hopes of discharging her loans still were slim to none.
During the 2019 bankruptcy case, she became so ill that she could not work, and was hospitalized. Once she got out, after paying her Chapter 13 Plan payments for over 4 years, she could no longer pay the trustee. I contacted US Department of Education for both loans, and applied for Total Permanent Disability Discharge directly. With a Physician’s certification that she could not work at all, the Total Permanent Disability Discharge was granted, and the Department of Education withdrew the remaining claims for both the HEAL and regular Federal Student Loans. Finally, the Debtor has eliminated her Student Loans.
In this case, persistence paid off, and the Debtor only paid what she could afford while she could work, and when she could not, we helped her eliminate the rest of the Student Loans. My longest running client finally is done with her Student Loan Debt!
While the illness and inability to work is not the ideal solution, the lesson here is that you can hold off the student loan creditor in a Chapter 13 Bankruptcy, and pay what you can afford if the lender is not being reasonable. This kind of solution may come in handy in the future for Federal Student Loans, as many income-based repayment plans may be eliminated, or require higher payments. And, for Private Student Loans, the lenders have been requiring high payments that have nothing to do with your income.
Call us, we can help you sort out your best options dealing with your student loans and what solution is best for you.
Daniel J. Winter
BankruptcyLawChicago.com
StudentLoanLawChicago.com
