Student Loans & Bankruptcy

Originally the Bankruptcy Code had no limitation on the discharge of student loans. However, Congress has amended the law several times, making the discharge of a student loan more difficult. The Bankruptcy Abuse and Consumer Protection Act of 2005 states that all student loans (meaning, loans taken on to pay secondary educational expenses) are non dischargable except in the case of severe hardship. The definition of hardship in this case would be that the loans are too high for some to meet. Moreover, the student loan debtor is required to commence a special additional proceeding and prove not just a current inability to pay, but a perpetual inability such as a permanent total disability. Therefore, in almost all bankruptcy cases, the loan survives the case.

In chapter 13 the loan can be provided for in the plan. This means that collection actions will be halted while the plan is in effect anywhere from 3 to 5 years. The problem is that when the plan ends the loan balance may have increased. Where the loans are not treated by the plan directly the student loan creditor can and usually does still file a claim. This results in a payment inside and outside the plan. The student loan debtor needs to carefully monitor these situations to assure that the payments have been credited.

Recently a case went to the United States Supreme Court regarding what happens if the plan provides for a foreignness of a student loan debt not withstanding the statute exempting the debt from the discharge. In United Student Aid Funds, Inc. v. Espinosa, the Court will decide on the requirements for discharging student loan debt via chapter 13 bankruptcy proceedings. Specifically the issue is whether a chapter 13 can provide a  discharge without proving "undue hardship" and without commencing a separate proceeding as required. In Espinosa, the US Court of Appeals for the Ninth Circuit held that student loans can be discharged within a chapter 13 plan if the creditor receives notice of the plan and fails to object. The appellate-level decision found that creditors- in the business of administering student loans- are unlikely to be misled by customary bankruptcy procedures. Ruling that bankruptcy courts have "no business" interfering in such procedures.

The existence of the Espinosa case should not lead to the assumption that the chapter 13 plan can discharge a student loan. Rather it indicates that even student loan creditors can be careless and this can have further consequences.

NEW STUDENT LOAN LEGISLATION

Effective July 1, 2009 Congress implemented the income-based Repayment Program a non bankruptcy alternative.  For more information on this program please check my blog or call me at 1-888-914-3328 (debt) or contact our bankruptcy law firm online.