Tag Archives: student loans

Can Student Loans Help You Qualify for Chapter 7 Bankruptcy?

StudentLoans_iStockIf you plan to file for bankruptcy and have a bundle of student loan debt, those loans might make it easier for you to be eligible for Chapter 7 bankruptcy.  A Texas bankruptcy court recently ruled that because a bankruptcy debtor’s substantial dentistry school loans were not consumer debts, he did not have to take the means test in order to file for Chapter 7 bankruptcy.

What Is the Chapter 7 Means Test?

In order to qualify for Chapter 7 bankruptcy, you must pass the means test. The Chapter 7 means test looks at your income and expenses and determines if you have enough money left over to repay your unsecured creditors a portion of what you owe.

The means test often prevents high earners from filing for Chapter 7 bankruptcy. For many debtors, Chapter 7 is preferable to Chapter 13 because it allows you to discharge most or all of your debts, and you don’t have to make payments to a plan for three to five years. (Of course, there are many situations when Chapter 13 is better than Chapter 7.)

Exceptions to the Means Test Requirement

There are several situations when debtors do not have to pass the means test in order to file for Chapter 7 bankruptcy. One of those is referred to as the business debt exception:  If the majority of your debts are not consumer debts, you don’t have to take the means test.

Texas Court:  Dentist School Loans Are Not Consumer Debts

In In re De Cunae, No. 12-37424 (Bkcy S.D. TX 2013), Mr. De Cunae, a dentist, filed for bankruptcy. He lost his dental practice after a difficult divorce, was a single father, and couldn’t work for a time because of a stroke. At the time of his bankruptcy filing, he was once again working as a dentist on a contract basis. He filed for Chapter 7 bankruptcy.

Mr. De Cunae argued that he did not have to pass the means test (his income was high enough that if he did have to pass it, he would have failed) because his student loans from dentistry school were nonconsumer debts, and therefore the majority of his debts were nonconsumer.  The Texas bankruptcy judge agreed, ruling that the portion of his dentist school loans (about $200,000) that was used for tuition, books, and fees, was not a consumer debt. On the other hand, the portion of the student loans that he used for household expenses (about $30,000) was consumer debt.

Loans Incurred With an “Eye Towards Profit” Are Not Consumer Debts

Bankruptcy courts often struggle to distinguish consumer and nonconsumer debts. The Fifth Circuit Court of Appeals (Texas is in this circuit) has come up with the following definition: A nonconsumer debt is one that the debtor takes out “with an eye toward profit.”

The Texas bankruptcy court found that Mr. De Cunae did not attend dentist school, nor incur loans to attend dentist school, only for self-improvement or self-esteem, as the United States Trustee argued. Instead, the court found that Mr. Cunae’s intent was to enhance his ability to earn a future living.  To the court, that seemed to fit squarely within the profit motive category — and therefore they were not consumer debts. The portion of student loans that Mr. De Cunae used for household expenses, however, were consumer debts.

Because he could classify most of his dentist school student loans as nonconsumer debt, Mr. De Cunea’s  total nonconsumer debt load outweighed his consumer debt load – and he was allowed to file for Chapter 7 bankruptcy without passing the means test.

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


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.