We’ve all had it happen – a client comes to you for help with his or her debt problems. We listen as they detail their financial hardships, confident that we can help. That is, until they drop a financial atomic bomb at our feet.
The Dreaded Student Loan
In spite of our best intentions, there’s nothing we can do because the client’s problems stem from student loan debts. For years we’ve told our clients that bankruptcy won’t solve the student loan problem. We’ve got insurmountable standards to meet for discharge of student loan debts, and it’s never a sure thing. For clients who may have a shot at discharge of their student loans, the next problem is one of finances: if someone’s in bad enough shape to meet the standards of 523(a)(8) then it’s a good guess that they can’t afford the legal fees required to bring the adversary proceeding.
Rather than send away the client with a promise to get in touch if the bankruptcy laws are ever changed to provide for discharge of student loan debt in bankruptcy, consider these options.
Options For Federal Loan Repayment
In the old days you had few choices for federal student loan repayment. If you couldn’t make those payments then you had to scramble until your financial situation turned around.
But the federal student loan game has changed, giving you more ways to remain in repayment. Your options now include:
- Standard Repayment: You pay a fixed amount each year for up to ten years.
- Graduated Repayment: Payments are lower at first and then increase each year for up to ten years.
- Extended Repayment: You can choose fixed or graduated payments over a 25 year period.
- Income Contingent Repayment (ICR): The loan servicer calculates your payment each year and based on your adjusted gross income, family size, and the total amount of your Direct Loans. Your payments change as your income changes, and the lender forgives any unpaid balance after 25 years.
- Income Based Repayment (IBR): Your maximum monthly payments will be 15 percent of discretionary income, the difference between your adjusted gross income and 150 percent of the poverty guideline for your family size and state of residence (other conditions apply). Payments adjust each year based on your adjusted gross income, and the unpaid balance is forgiven after 25 years. For people who were new borrowers on or after July 1, 2014, payments are 10% of discretionary income and the unpaid balance is forgiven after 20 years.
- Pay-As-You-Earn (PAYE): Your maximum monthly payments will be 10 percent of discretionary income, the difference between your adjusted gross income and 150 percent of the poverty guideline for your family size and state of residence (other conditions apply). Payments adjust each year based on your adjusted gross income, and the unpaid balance is forgiven after 20 years.
- REPAYE: Under this brand proposed new system (which has not yet been approved but is expected to be available in 2016), payments will be capped at 10% of a borrower’s discretionary income. The repayment term is 20 years for students who took out federal loans for undergraduate education only, and 25 years for those who also took out loans for graduate school. If your payments do not cover all of the accrued interest for that month, your interest accrual will be capped at 50% of the unpaid interest. As opposed to IBR and PAYE, federal loan services will consider your joint marital income, regardless of whether you file taxes jointly or separately from your spouse, when calculating your payment due.
With payments that can feasibly be as low as $0 per month, your clients may find that their student loan problems, such as student loan tax deduction, are solved by merely submitting an application to the U.S. Department of Education.
Federal Loan Discharge and Forgiveness Options
Though not a bankruptcy matter, federal student loans come with a host of discharge and forgiveness programs. To find out more, take a look at this Student Loan Forgiveness Guide to see if you’d be eligible.
The first, and most often overlooked, program is Total and Permanent Disability Discharge. If your client is unable to engage in gainful employment and expected to remain in that condition for the foreseeable future, he or she can provide information to the U.S. Department of Education (ED) to prove total and permanent disability.
Students may be eligible for a discharge of Direct Loan or FFEL Program loan if their school falsely certified their eligibility to receive the loan based on ability to benefit from its training, if they were the victim of identity theft, or the school certified eligibility, but because of a physical or mental condition, age, criminal record, or other reason your client was disqualified from employment in the occupation in which he or she was being trained.
If your client is a teacher and did not have an outstanding balance on a Direct Loan or FFEL Program loan on Oct. 1, 1998, and has been teaching full-time in a low-income elementary or secondary school or educational service agency for five consecutive years, your client may be able to have as much as $17,500 of his or her subsidized or unsubsidized loans forgiven.
For borrowers employed in certain public service jobs and who make 120 timely monthly payments on Direct Loans after October 1, 2007, the remaining balance may be forgiven under Public Service Loan Forgiveness. This is a program that will likely get a lot more coverage as we approach November 2017, which is when the first people will hit their 120 month mark.
There are various discharge and cancellation programs that may be available to people who serve in AmeriCorps, Peace Corps, Volunteers in Service to America (VISTA), Army National Guard, National Health Service Corps, and Nurse Corps. Lawyers, medical professionals and teachers should also check into industry associations for lists of lesser-known loan repayment assistance programs.
Private Student Loans – A Hybrid We’ve Seen Before
Private student loans are all securitized much in the same way as mortgages, yet they’re unsecured debts like credit cards. Use this knowledge to help your client mount a defense against aggressive collection tactics.
When you understand securitization you’ll immediately see the holes in the student loan company’s position. They’ve got little proof regarding chain of title and proper ownership, are hard pressed to provide a reliable accounting, and likely don’t have possession of any original documents underlying their claim.
As opposed to mortgages, which come with the risk of foreclosure, private student loans are completely unsecured. That means lenders are far more willing to settle unpaid obligations on a far more attractive basis than might otherwise be the case.
For the client who simply can’t make the private student loan payments, a strategic default may not be a bad idea. You can easily step in to stop collection activity by invoking the provision of the Fair Debt Collection Practices Act as well as your state UDAP laws; this gives your client time to save up for a settlement without the hassle of phone calls and collection notices.
One added bonus is that private student loans are governed by the same statutes of limitations that govern collection of other past due debts. It’s not unheard of for a lender to neglect to file a lawsuit against your client until well after the expiration of the statute of limitations, in which case your client could win the Student Loan Lottery.
Chapter 7 Bankruptcy May Be Useful After All
Though Chapter 7 bankruptcy won’t necessarily wipe out the student loans, it will relieve your client of other debts. For the consumer debtor facing hundreds of dollars each month in credit card debt payments, a bankruptcy discharge may free up enough money to pay the student loan companies. In some instances, the loan company can agree a reasonable loan to begin with. This will mean you won’t have to worry about any repayments as they’ve been done fairly, you might want to have a look into Cashfloat reviews for more information.
If part of your client’s troubles include past due tuition, remember that bankruptcy can wipe out those obligations as well. In the absence of a promissory note, tuition obligations are not covered by Section 523(a)(8).
Using Chapter 7 bankruptcy as a way to free up scarce monthly income may give your client to relief they’re seeking when it comes to figuring out how to pay the student loans.
Use Chapter 13 As Leverage For Negotiation
Even if your client won’t be able to obtain a discharge of his or her student loans in bankruptcy, Chapter 13 may still prove to be a powerful solution to manage payments – especially for private student loans, which come without any of the repayment options available to federal loans.
More to the point, Chapter 13 can provide you with the ability to engage in what I call “offensive defense” when it comes to student loans.
Under Federal Rule of Bankruptcy Procedure 3001(c)(1), when a claim is based on a writing, “a copy of the writing shall be filed with the proof of claim. If the writing has been lost or destroyed, a statement of the circumstances of the loss or destruction shall be filed with the claim.” Federal Rule of Bankruptcy Procedure 3001(c)(2) states that if, “a claim includes interest, fees, expenses, or other charges incurred before the petition was filed, an itemized statement of the interest, fees, expenses, or charges shall be filed with the proof of claim.” A lender that fails to comply with the provisions of Federal Rule of Bankruptcy Procedure 3001 may find itself without the ability to collect on the claim through the Chapter 13 Plan.
When reviewing a Proof of Claim filed by a lender in a Chapter 13 bankruptcy case, do so with a critical eye. As we’ve already discussed, private student loan companies in particular have a difficult time proving ownership of the loan. That may provide you with an opportunity for a claims objection, which in turn may give you an opening to either negotiate the balance due with the holder of the note or knock out the claim entirely.
The Value of Thinking Expansively
Student loans plague so many of our clients that it’s impossible to go through more than a few days without seeing someone who could benefit from relief from their educational debt burdens.
Though the bankruptcy laws make it difficult for all but clients in the most dire of situations, all hope is not lost. By thinking expansively and being proactive, we can all find ways to help our clients effectively handle their educational debts.