Category Archives: Student Loans

Student Loan Debt & Chapter 13 Bankruptcy

ASK LEON

Bankruptcy expert Leon Bayer answers real-life questions.

Dear Leon: I received a discharge in a Chapter 7 bankruptcy in 2009 (three years ago). I have a large delinquent private student loan – the outstanding balance is $44,000.  The student loan holder will settle only if (1) I agree to allow it to enter a judgment against me, or (2) I agree to high payments, which, quite frankly, I can’t afford. 

Can I file a Chapter 13 bankruptcy and get into a better payment plan? Would this reduce or stop the interest from accruing? If this will work, how long will the Chapter 13 plan allow me to repay the debt?

Thank you in advance for your assistance.

Erin

Dear Erin,

Dealing with student loan debt is tough because there is rarely a perfect remedy. To begin with, I am going to assume that an “undue hardship discharge” of your student loan is not an option. (To learn more about discharging student loans in bankruptcy because of undue hardship, see Nolo’s article Student Loan Debt in Bankruptcy.)

Paying Student Loan Debt Through Your Chapter 13 Plan

If you are eligible for Chapter 13 bankruptcy and can confirm a Chapter 13 plan, you can manage any type of student loan, whether private or public, through the plan for up to five years. (To learn how a Chapter 13 plan works, see Nolo’s Chapter 13 Repayment Plan area.)

Your Student Loan Will Not Be Discharged and Interest Will Accrue

However, you cannot discharge (wipe out) the student loan debt, so if you cannot pay it in full during your Chapter 13 case, the remaining balance will remain when your case is over.

In addition, in your case, because you received a Chapter 7 discharge less than four years ago, none of your debts would be discharged at the end of your Chapter 13 case. (To learn more, see Multiple Bankruptcy Filings.)

If a debt is not dischargeable in bankruptcy, the interest owed on the debt will continue to accrue during the bankruptcy.

Advantages of Using Chapter 13 to Repay Your Student Loan

I do think filing for Chapter 13 bankruptcy may offer some advantages in your situation. Some or all of these might not apply to every situation, so you should seek advice from an experienced bankruptcy attorney before you decide what to do.

  • With Chapter 13, your monthly payments (which you make for up to five years) may be much less than those the creditor is demanding. At the same time, you’ll get temporary relief from aggressive debt collection for the duration of the Chapter 13 case.
  • After you file for bankruptcy, you might be able to reach a better agreement with the creditor than what it previously offered. This is because, when faced with the prospect of small payments for the next five years, your student loan creditor might prefer to rehabilitate the debt and restore it to normal monthly payments.
  • Filing a Chapter 13 bankruptcy can give you the time and peace of mind to improve your finances.
  • After you complete your case, some lenders may be willing to rehabilitate the loan and restore the normal contractual payment.
  • Even if nothing better is accomplished, you have bought up to five years of peace of mind before everything “hits the fan” again.

I hope this insight is helpful.

– Leon

Guest blogger Leon Bayer practices bankruptcy law in Los Angeles, California.  He is a partner at Bayer, Wishman & Leotta.  

The opinions and advice in this blog post are from Mr. Bayer alone, and should not be attributed to Nolo.  By answering a question on this blog, Mr. Bayer does not become your lawyer.

Problem With a Private Student Loan? Tell the CFPB

In February, the newly formed federal Consumer Financial Protection Bureau (CFPB) put out a call to student loan borrowers:  If you have a beef regarding a private student loan, file a complaint on the CFPB website.

What Is a Private Student Loan?

If a bank or other financial institution loaned you money to attend school, and that loan is not backed by the federal government (that is, it’s not federally guaranteed), you have a private student loan.

The CFPB Now Oversees Private Student Loans

Prior to the formation of the CFPB, there was no one agency that oversaw and regulated the private student loan industry. (Public student loans, on the other hand, are regulated by the Department of Education.) Since July 2011, the CFPB has taken over that role. As part of its oversight, the CFPB has created an ombudsman program. The ombudsman will review complaints about private student loans and assist those borrowers.

Types of Complaints

The CFPB ombudsman is urging students and former students to file complaints of any nature. Some examples of complaints it anticipates receiving include:

  • trouble making payments
  • confusing advertising or marketing terms
  • billing disputes
  • deferment and forbearance issues, and
  • debt collection and credit reporting problems.

You can find the online complaint form, here.

Or, if you don’t want to file a formal complaint, but just want to tell your story, you can do that here.

What Will the CFPB Do?

The CFPB states that it will help all student loan borrowers who are having trouble:

  • getting a private student loan
  • repaying a private student loan
  • managing a student loan that has gone into default, or
  • dealing with a student loan that has been referred to a debt collector.

Once the CFPB receives your compliant, it will give you a case number so you can track progress of the complaint.  It will forward your complaint to the financial institution involved and then keep track of progress. The CFPB says it expects to have cases come to resolution within 60 days. It’s unclear from the information on the CFPB’s website what role the ombudsman will take in resolving those issues.

The CFBP will use the information it gathers from borrowers’ complaints and stories to report to Congress on the private student loan industry.

Another Handy Tool

The CFPB also has a handy online tool, the Student Debt Repayment Assistant, to help you figure out your student loan repayment options. You can also find information about repayment in Nolo’s article Student Loan Repayment Options.

How to Contact the CFPB

 

Consumer Financial Protection Bureau Still Has No Director

In July, I blogged about the nomination of Bill Cordray as the Director of the Consumer Financial Protection Bureau (CFPB), the new federal agency created in the wake of the financial debacle on Wall Street that was responsible, in part, for the contraction of the U.S. economy. The CFPB is a government watchdog agency, overseeing consumer protection for all things related to lending, including credit cards, private student loan, pay day loans, and mortgages.

(You can learn more about consumer protection here.)

Since July, Republicans have continued to fight against the CFPB, vowing not to approve a Director until the agency is restructured. The U.S. Chamber of Commerce has also expressed its opposition to the CFPB, arguing that it would be too powerful as it currently stands.

Without a Director, the CFPB is prevented from performing some of its intended tasks, including overseeing some financial sectors that currently have no agency watching over them (like mortgage brokers and payday lenders).

Several days ago, the Senate Banking Committee approved Cordray as the Director of the CFPB. This is definitely a welcome move by consumer advocates. But Senate Republicans continue to promise to block the nomination of any director to the CFPB until the agency’s powers are diluted.

 

Can You Discharge Student Loans in Bankruptcy?

Question:  I have student loans from 15 years ago.  I have been paying them back slowly, but I recently lost my job and am struggling to keep current on my payments. I am 55 years old and am having trouble finding another job. I am thinking of filing for Chapter 7 bankruptcy to get rid of other debts. Can I get rid of the student loans in bankruptcy?

Answer: Student loans are rarely discharged in bankruptcy.  But given your age and payment history, you might be able to get a court to discharge yours. Here’s how the law works.

Generally, in order to have student loans discharged in Chapter 7 bankruptcy, you must show that continued payment would cause you “undue hardship.” Most courts determine if you have met the undue hardship standard by applying what is called the Brunner Test. The Brunner Test consists of these three factors:

  • Based upon your current income and expenses, you cannot maintain a minimal standard of living for yourself and your dependents if you are forced to repay your loans.
  • Your current financial situation is likely to continue for a big part of the repayment period.
  • You  have made a good faith effort to repay your student loans.

Courts are very reluctant to wipe out student loans in bankruptcy, and rarely find that debtors have met the Brunner Test (or any other test the court may use). However, they are more likely to discharge student loans if you are over 50, will probably remain poor or with very low income for the remainder of your working years, and have demonstrated an effort to pay off your loans.

Given your situation, you may be one of the lucky few able to discharge student loans in bankruptcy. Talk to a bankruptcy attorney familiar with student loan discharges so you can find out how the bankruptcy judges in your area treat student loans.

And keep in mind that there may be other ways to handle your student loan payments, from reducing payments to possibly even cancelling them. To learn more, check out Nolo’s Student Loan Debt area or visit the National Consumer Law Center’s Student Loan Borrower Assistance Center.

New Federal Rules Aimed at For-Profit School Rip-Offs

Yesterday, June 2, 2011, the Department of Education released final rules aimed at for-profit schools — requiring them to better train their students for gainful employment. Under the new rules, if schools don’t meet certain standards for their graduates, students will not be able to get federally backed student loans to attend the school.

The Background: For-Profit School Rip-Offs Hurt Students and Taxpayers

For years (decades really), many for-profit schools have enticed low-income students to sign up for large amounts of student loans  with the promise of  getting a good job when they graduate. Sadly, the instruction offered at some of these schools is of such poor quality that students graduate with no chance of getting a job in their field of study. While those attending for-profit schools represent only 12% of all students receiving higher education, they represent a whopping 46% of all students with defaulted student loans.

The end result: Huge profits for the  schools, huge debts with no chance of increased income for the students, and lost money to the taxpayers (because of all the loan defaults).

The New Rules: Preparing Students for Gainful Employment

The new rules will require schools to demonstrate that a certain percentage of their graduates have received training adequate to be gainfully employed in a recognized occupation. The rules will apply to nonprofit and for-profit schools, although the Department of Education predicts that only 1% of nonprofit institutions will be impacted by the regulations.

Under the regulations, schools must meet one of the following three tests:

  • at least 35% of former students are repaying their loans (which means reducing their loan balance by at least $1)
  • the estimated total annual loan payment of a typical graduate does not exceed 30% of the graduate’s discretionary income, or
  • the estimated total annual loan payment of a typical graduate does not exceed 12% of the graduate’s total earnings.

The regulations will not go into effect until July 1, 2012.  Schools will get “three strikes” (meaning, missing the above metrics) before they are kicked out of the federal student loan borrowing programs.

I think the more important regulations rolled out are those that will require schools to disclose to students: total program costs, loan repayment rates, and the debt-t0-income ratio for typical graduates, among other things.

Will the New Rules Make a Difference?

Quite frankly, that the bar has been set so low (do you really want to attend a school where only 35% of former students can repay $1 of their student loans?)  says a lot about how bad the scams are right now. So, yes, the new regulations will put a few of the worst schools out of business (the Department of Education estimates about 5%), and will force some schools to clean up their act, at least a little bit. But students still need to go into these for-profit schools with their eyes wide open. To that end, the regulations requiring schools to disclose some important facts about costs, loan repayment amounts, and how much their graduates earn will hopefully do more to protect unsuspecting students than do the “three strikes” rules. Maybe once students see the numbers, they’ll opt for community college or other nonprofit learning institutions.

The effectiveness of these new disclosure requirements will depend on how they are presented to students, and how much “policing” the Department of Education is able to do.  In my experience, the scam trade schools are quite creative when it comes to “burying” the fine print, especially when the prospective students don’t speak English or have little education.

All in all, however, the regulations are a step in the right direction. At least the Obama administration, with these new rules, has called attention to the billion dollar for-profit school industry that often leaves students and taxpayers in the lurch.

To learn more about the new regulations, check out the Department of Education’s press release on the subject.