Bankruptcy of Your Student Loans

Bankruptcy of Your Student Loans

Tuesday, April 12, 2016

LET'S LOOK AT BANKRUPTCY OF THAT STUDENT LOAN


Step #7 in “Steps Needed to Discharge Your Student Loan”

As I continue to write about my experience and my success in discharging my student loan debt, I want to provide information that will help anyone who is struggling with a student loan and who has reached the point where unless they win the lottery their student loan is never going to ever be paid off.

When I reached that point, I made the decision to once again file bankruptcy and this time I was going to attempt to include my $130,000.00 student loan. I had filed two previous bankruptcies in my lifetime, not something I am proud of, but also I am not ashamed to say it either. My life has been very difficult and I too often found myself out of work and out of money. I never looked for trouble, but too often it found me.

This week I am going to share some information on Bankruptcies and how a discharge of student loans are viewed by the legal system.

For over 25 years student loans have been basically “prohibited” from being discharged as part of a bankruptcy chapter.

Within the laws of the bankruptcy this prohibition is found within Section 523 subsection (a) and (8) of the United States Code, article 11. Learn this section well. Finding articles and cases about bankruptcy and student loan debt is easily searched in any browser using the key phrase 11 U.S.C §523(a)(8).

Here is what is stated in 523(a)(8):

Section 523 (a)(8) states that student loans cannot be discharged, unless payment of the student loans would impose an undue hardship upon the debtor or his dependents.

This section has been part of the bankruptcy law for over twenty-five years. It was also amended in 2005 to include private student loans. Please take note of the word “unless” in that section.

You have to admit the way they worded this paragraph is kind of confusing; especially in the context of the bankruptcy code where they list certain debts that the code calls “exceptions to discharge”. Which includes debts for taxes and other debts that fall under illegal activities.

Take a look at §523 (a). https://www.law.cornell.edu/uscode/text/11/523. Notice that under (a) it begins with (1) followed by capital (A), (B) (i)(ii), and so forth, until you reach (8). And (a) (8) is where we find the 'undue hardship clause'.

Let me go further.... Under (8) the next bullet is another capital letter (A). The (A) is further delineated by two more subparagraphs (i) and (ii), then those paragraphs are followed by (B) which stands alone with its own statement. Admittedly the code's bulleting standard is a bit awkward to follow along. It takes a while to get what they are doing, but once you read through section 523, a couple of times, it becomes less awkward. Take a look at the full text.

Here is the complete section under (8):

(8) unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents, for—
(A)
(i) an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or
(ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend; or
(B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual;

(Note that I highlighted in red the word “for-”.... This “for” further helps describe what is included within the 'undue hardship' descriptor of the “unless” phrase, and “for” includes what can be simplified as 'student loans' Stated as: educational benefit overpayment; loan made; (which is) insured or guaranteed by a governmental unit, or made under any program funded in whole or part by a governmental unit or non-profit institution; or, (ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend; or (B) any other educational loan that is a qualified education loan as described by (the IRS).”


This is the undue hardship clause in full … which “permits” you to include student debt in a bankruptcy proceeding. HOWEVER, you must understand that just filing a personal bankruptcy DOES not wipe out the debt. The U.S. Bankruptcy Court requires that you “PROVE” undue hardship. And that requires a “separate” legal filing which is called an “Adversary Proceeding” (AP).

Filing the AP is needed to state your case and acts as a legal “complaint” against the creditors (your student loan lenders or holders, and in most cases the Department of Education of the United States of America). It boils down to filing a lawsuit against the U.S. Government, and can only be filed in a U.S. Federal Bankruptcy Court.

You may wonder why the IRS statute is included under (B). The bankruptcy code refers to the IRS in this paragraph in relation to the phrase a qualified education loan”. (Bear in mind not all loans meet the criteria under the wording “qualified”). My understanding is that this was written into 523 to deal with Private Student Loans which in 2005 were included in the exception to discharge and not dischargeable unless undue hardship can be proven.

Here is a great link to help describe section 221(d)(1) of the Internal Revenue Code of 1986:

If you attended a private training school like for example a flight school or other specialty school which would be a non-traditional college or university, then you need to determine if money you borrowed to attend falls within the term “eligible educational institution" . To help you understand the question, 'so what is an qualified educational institution'? Basically it is any post-secondary school authorized to participate in the U.S. Department of Education Student Loan program. Quoting the author Peter Scribner, Esq., at the link provided above: It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) post-secondary institutions. The educational institution should be able to tell you if it is an eligible educational institution."

As I have written in previous steps, you need to learn everything you can about the status of your loans. Things like... who is the loan holder; what type of loans are they (private or federal backed loans); and were the loans for education benefits at a qualified institution? The link for federal loan information (which may include private loan information as well) is located here: https://studentaid.ed.gov/sa/. Be sure to either copy or print out the information and save it for later as you will need this to build a case for undue hardship, in the bankruptcy court.

Step #7) Research Bankruptcy Chapter Rules and Forms


Begin now to save all of this information to a separate file on your computer. Next time I will talk about what records I needed to win my discharge of my $130,000.00 student loan debt.

OK let's assume you want to consider filing bankruptcy...

My question is are you willing to admit that you have reached a point of no return and no way out? Are you struggling so much that you cannot pay other bills? Do you have other debts that you cannot make payments on? Are creditors driving you insane, calling every day with threats of lawsuits or wage garnishments?

To discharge your student loans using an Adversary Proceeding you are going to have to have other debts that you need to be free from...(You cannot file bankruptcy just on the student loans) You must have other debts besides the student loan debt, and those debts need to be part of a personal bankruptcy filed with a U.S. Bankruptcy Court in your local area. To find a U.S. Federal Bankruptcy Court in you locality use this link: http://www.uscourts.gov/court-locator.

What is your financial situation? What is your family situation? Are you single, married, divorced? Do you have children; and or child support obligations? Do you own property? Do you own a home, more than one car, boats or other recreational vehicles? Do you have a high paying job or are you under-employed or even unemployed? What is the total of your debts and of your assets? Do you have a savings account, IRA's CD's, Trust Funds, Stocks, Bonds, etc? All of this information and more is going to be needed if you file for bankruptcy.

In bankruptcies there are two choices for individuals. A Chapter 7, and or a Chapter 13 personal bankruptcy. If you are married you will be filing jointly, and assets and debts of your spouse will be listed on the income, expense, and debt schedules of a chapter.

My bankruptcies (all three of them) were filed as Chapter 7's. Chapter 13 is basically a re-payment plan that the bankruptcy court sets up to pay back your creditors over 3 to 5 years.
See this link to see the descriptions and differences of a Chapter 7 and 13: http://www.ms-bankruptcy.com/bankruptcy-info/differences.

The great thing about filing bankruptcy is being able to get a “fresh start”. I filed 3 times now and only one time did I use an attorney; who basically did very little to earn his money or my appreciation. Filing without an attorney is not difficult, and most courts are very helpful to those who cannot afford a lawyer. Bankruptcy courts even provide fee waivers or payment options for the filing fees. If you have no money or assets at the time of filing do not pay the fee, but request a fee waiver first; the court will make the decision to waive the fee or have you pay based on your income and expense schedules. Both times I filed without a lawyer my fees were waived.

A side note: I think this is worth a smile! When I filed my chapter 7 with the clerk here in Alexandria, she was not only VERY helpful, but she said to me, “Mr. Precht you have everything I need to file your case” I said “well, I tried to make sure I have it all” she replied “you do... most attorneys do not have everything right (when they file)”. The same clerk became the manager of my case and we had a great rapport... When I won my $130,000 discharge she congratulated me on a job well done!

Once you locate the U.S. Court where bankruptcies are filed in your area, you will see that most of them maintain a website. Copy and save the link to your bankruptcy folder. You will find that each of the courts provide most of the forms you need to file a chapter 7 or 13. The forms are “fillable” on-line, and are generally PDF documents which once you fill in the information, you can print out. Note: sometimes filled out PDF forms cannot be saved to a file but must be printed out when completed, otherwise you have to start all over!

Note also that most courts have what are referred to as “local rules” and or “local forms”. While the U.S. Bankruptcy Court has standard forms, some regional courts have other rules and forms specific to their own court. The web site for the U.S. Court to access forms is here: http://www.uscourts.gov/forms/bankruptcy-forms.

The local site where I filed my chapter is here: https://www.vaeb.uscourts.gov/wordpress/. The tabs at the top of the page include one called “Filing Requirements” the drop down menu includes a list of the chapters, and lists two important links, one is “Fee Waivers” and the other is “Filing Without An Attorney (Pro Se)”. As I say, the courts are very helpful, and with a few key strokes you can learn all about the process of filing a chapter without the expense of a lawyer.

The other tab of importance at this point is “Forms” the drop down takes you to a page where it lists “National Forms” and “Local Forms” (you need to be familiar with both). If you call or visit the court in your area, the clerk will most likely have a no-cost package of information which includes the basic instructions for filing a chapter.

At the Virginia website they provide Pro Se information in a PDF document. Here is that doc: https://www.vaeb.uscourts.gov/wordpress/?wpfb_dl=206.

Take note that most of the filing done by attorney firms is now filed electronically. In my court, they do permit Pro Se filers to file electronically, thus I had to file in person by going to the court and having the clerk file my chapter forms, schedules, and pleadings. Your court may be different, so check (read all of )the local rules.

BEFORE FILING BANKRUPTCY FORMS

OK... Anyone who plans on filing a chapter must complete a “credit counseling course” before they file with the court. Here is the rule:

Credit Counseling & Debtor Education:
All individual debtors who file a Chapter 7 bankruptcy are required to obtain credit counseling from an approved provider within 180 days before filing for bankruptcy relief, pursuant to U.S.C. Section 109. A certificate of credit counseling and debt repayment plan, if any (as required by 11 U.S.C. Section 521) from the approved provider must be filed with the petition. Pursuant to Local Bankruptcy Rule 1007-1, if these documents are not filed with the petition, the Clerk shall enter an order dismissing the case.
Source: https://www.vaeb.uscourts.gov/wordpress/?page_id=1308


In my situation I searched on-line and used the phrase “free pre-bankruptcy credit counseling” and several advetisements popped up. Note: by law, if the debtor is unable to pay, the course provider must agree to waive the fee. Most of these firms offer a on-line course, while others may provide classroom type training sessions. I chose the on-line version, and I was granted a fee waiver. The company I used was: DebtorCC, based in New Jersey. While the website shows pricing, I emailed them and requested a waiver, and they agreed to waive the fees for both the pre-filing-bankruptcy-credit-counseling course and the post-bankruptcy courses.


The two required courses take about an hour each to complete, and while it seems pretty trivial and some of the questions and information can be a tad elementary, just go through the course, and get the certificate. You will need to file a copy (keep one for your records) with the clerk along with all of the required chapter forms and schedules. They will not file your chapter without this course certificate. The post-bankruptcy certificate must also be filed once you win your case - or you could hold up the closing of your case and or be found in contempt.


OK... I am going to stop here for now. You have a lot to read and research! I will continue next time with some help on what else you are going to need to file a chapter 7 or 13 personal bankruptcy.


If you are following this blog, let me hear from you! I love to know who is finding this website and what help you are looking for. My hope is to be able to provide some useful information based on my successful win and full discharge of my $130,000.00 student loan debt using the Undue Hardship Provision of the Bankruptcy Code U.S.C.A. 11 §523(a)(8).


Until next time, best regards, Richard Allan Precht









2 comments:

  1. This is a very detailed overview of the issue. Thanks for the in-depth account on the problem. It is close for me as well. Once for fun I decided to play lotto (as you mention in the first passage). After checking Powerball results USA I discovered it was a waste as well.

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  2. Lacy, Playing Power Ball and expecting to win is certainly a gamble.... In many ways taking out loans to go to college is also becoming a huge gamble, due to the fact that every student takes a risk at finding a job that will actually pay well enough to allow them to pay off the loan and still live a middle class life!

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