Student Loans Bankruptcy Chapter 7 - How To Bankrupt Your trainee Loans
Everyone knows that you cannot bankrupt trainee loans. hunt the web with the
keywords "bankruptcy" and "student loans" and you get either many listings for
lending institutions trying to get you to take out another loan, or you see articles
telling you that it is virtually impossible to bankrupt your trainee loans except
under the condition of "undue hardship"-- and then they fail to tell you anything
how to go about proving the condition. How frustrating!
Student Loans Bankruptcy Chapter 7
Below is a overview of the salient points given in Bankrupt Your trainee Loans and
Other extraction Strategies by Chuck Stewart, Ph.D. (Isbn 0-9764154-5-3). Here is
an author who has been straight through the process, successfully bankrupting ,000 in
student loans, and has written a clear, step-by-step, study by hand to help
other honest debtors in their efforts to have their trainee loans discharged straight through
bankruptcy or Compromise or Write-Off.
The bankruptcy courts originally treated trainee loans the same as any other
unsecured debt. trainee loans could be listed in a lesson 7 filing and fully
discharged. However, in 1976 Congress modified the Higher study Act of 1965
and required trainee loans to be nondischargeable unless: (a) the debt first became
due more than 5 years before the date of filing of the bankruptcy, or, (b) failure to
discharge the debt would cause "undue hardship" to the debtor or to dependents of
the debtor. In 1990, Congress extended the 5 year rule to 7 years and ultimately
eliminated the time limit altogether in 1998. Thus, the only selection debtors
currently have for bankrupting their trainee loans under 11 U.S.C.A. Bankruptcy
Reform Act (1998) §523(a)(8) is to prove repaying their trainee loans would cause
an "undue hardship."
"Undue Hardship" Analysis
Unfortunately, Congress failed to define the term "undue hardship." A report of the
discussion and turn over by the legislature with regard to the study amendment is
unrevealing as to the meaning of undue hardship. Thus, it has been left up to the
courts to rule its meaning. Aggressive defense by agency of study
attorneys has influenced the court to a decidedly rigid interpretation. In general, for
a debtor to qualify for an undue hardship extraction of trainee loan debt, the debtor
must be living at, or below, the Federal Poverty Guideline and have no hope for
increased future revenue big sufficient to make payments on the loans.
Over the past quarter-century, courts have developed many tests to rule the
existence of undue hardship. The prominent test used in most court is the Brunner
Test. Other tests consist of the Bryant Poverty Test, Totality of the Circumstances
Test, and the Johnson Test. A report of these tests search some tasteless
characteristics used by courts to rule undue hardship. These include:
Characteristic A. An estimation of the debtor's current living condition and the
impact that has on the potential to repay the loan while maintaining a "minimal living"
standard.
Characteristic B. The debtor's future prospects for repaying the loan.
Characteristic C. Evaluate either or not the debtor demonstrated good faith during
loan repayment.
There are two steps complex to demonstrate Characteristic A--
1. Every court reviews the debtor's current living condition and evaluates it against
the Federal Poverty Guidelines. Debtors with incomes above poverty will be
scrutinized by the courts to assure all expenses are "minimized." Expenditures will
be compared to an "idealized" debtor of similar situation but at the lawful poverty
level.
2. Once the court is satisfied the debtor has minimized living expenses, the court
evaluates either repaying the trainee loans will push the debtor down to or below
the poverty level.
Characteristic B is impossible to predict. Courts have recognized the folly in trying
to predict future income, but it has not stopped them from including it in their
analysis. Courts have thought about many factors that may influence future revenue
including personal limitations such as: (1) healing limitations, (2) keep of
dependents (and their healing conditions, if applicable), and (3) lack of useable job
skills. Courts have also thought about some external factors such as age
discrimination (for debtors over age 50), having been labeled a whistleblower, and
other group and cultural factors that influence the potential to gather gainful employment.
Congress was most implicated with debtors who seemingly "defrauded" the
government by bankrupting their trainee loans soon after graduation. To reinforce
that concern, courts want debtors to demonstrate "good faith" attempts at repaying
student loans. Characteristic C, Good Faith, means that the debtor must show that
he or she made payments on trainee loans whenever his or her revenue was above
the poverty level, or, when there was insufficient income, he or she gather
deferments or forbearances to keep the loan in good standing.
Income Contingency reimbursement (Icr) Plan
Even if a debtor clearly demonstrates that the undue hardship determination applies to his
or her case, the revenue Contingency reimbursement (Icr) Plan may unravel the case.
The Icr allows trainee loan reimbursement to increase or decrease according to the
income of the debtor. As such, if the debtor's revenue is below the Federal Poverty
Guideline, then the payment drops to zero. The plan lasts for 25 years and any
outstanding debt is discharge. However, the loan discharged amount is treated as
income by the Irs and revenue taxes will be due.
It is often stated by agency of study attorneys that Icr makes it impossible
for debtors to extraction their trainee loans in bankruptcy. They utter that
anyone can make "zero dollar" payments, thus negating the undue hardship
exception of §523(a)(8). In many cases this is true. But for some debtors the Icr is
inappropriate. For example, fantasize being 65 year or older living on Ssi or on a
fixed revenue and then a large tax liability descends upon you for debt discharged at
the end of an Icr plan. That would place an undue hardship upon you. In fact, the
Icr is categorically inappropriate for anything over the age of 40 because of the tax liability
at the end of the reimbursement period.
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