Bankruptcy and Student Loans
Understanding the relationship between bankruptcy and student loans.
Student Loan Interest Rates May Increase Soon.
Congress is currently at war over student loan interest rates. Interest rates on Stafford loans will double soon if congress doesn’t act. But although no one seems to want this to happen, the parties can’t agree on what to do about it. This is an important issue for people considering bankruptcy because student loan debt is more difficult to avoid than other debts.
Even if You File Bankruptcy, You May Still Have to Repay Your Student Loans.
Bankruptcy discharges many of an individual’s outstanding debts. When a debt is discharged, the debtor does not have to repay it. However, bankruptcy law makes an exception for student loan debt. Student loan debt will only be discharged under special circumstances.
Section 523(a)(8) of the US Bankruptcy Code provides:
(8) unless excepting such debt from discharge under this paragraph would
impose an undue hardship on the debtor and the debtor’s dependents,
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;
This section means that student loans will only be discharged when requiring the individual to repay them would impose an undue hardship on the debtor or the debtor’s dependents. The question then is – what counts as an “undue hardship”?
There is no statutory definition for “undue hardship.” Courts have had to define the term themselves, and different jurisdictions have developed different hardship standards. Generally, courts look at factors such as the finances available to the debtor as they are filing bankruptcy, the debtors’ likely future earnings, and the financial needs of the debtor’s family, among other things. In New York, courts follow the test set out in Brunner v. New York State Higher Education Services Corp., 831 F.2d 395 (2d Cir. 1987). In this case the court asked three questions. First, would requiring the debtor to repay the student loan debts put the debtor, or the debtor’s dependents, below a minimal standard of living? Second, is this financial situation likely to persist for the rest of the loan repayment period? Third, has the debtor made good faith efforts to repay the loans? A New York court is only likely to discharge a student loan debt if these questions are answered in the affirmative.
While the factors to be considered may vary from one jurisdiction to another, courts generally agree that the hardship must be “undue” – that is, beyond “ordinary” or “garden variety” hardship. The point is that student loans will only be discharged under extraordinary circumstances.
If you have questions about student loans, bankruptcy, or other legal issues, the Law Firm of Vaughn, Weber & Prakope, PLLC is here to help. Call us at (516) 858-2620 to set up a free consultation.
INTRODUCTION TO BANKRUPTCY EXEMPTIONS: FILING BANKRUPTCY DOES NOT MEAN YOU WILL LOSE EVERYTHING.
People are not required to forfeit all of their property when they file bankruptcy. Bankruptcy laws are intended to use individuals’ property to satisfy as many debts as is reasonably possible. The process is not intended to pauperize people. In order to avoid this result, bankruptcy law exempts certain property, up to a maximum value, from the bankruptcy estate. Property that is exempt from the estate is not forfeited in the bankruptcy. That means individuals may keep the exempt property even after they file bankruptcy, as long as the value of that property does not exceed the statutory limit. Federal law allows states to replace the federal exemption scheme with their own. New York allows individuals to choose between federal and state exemptions. Both federal and New York law essentially exempts the same types of property, but the two laws place different limits on each type. This means that people may be able to keep more of their property under one law rather than the other, depending on the types of property they own at the time they file bankruptcy.
Exempt property generally falls under five categories:
1. Basic Necessities and intimate personal items: This category includes personal items such as wedding rings, religious texts, domestic animals, a certain amount of cash, and a home (up to a maximum value).
2. Insurance policies and annuities: Payments individuals receive from insurance claims or annuities may be exempt. This means that after individuals file bankruptcy, they may still receive, for example, payments received under a life insurance plan taken out on a deceased spouse.
3. Motor Vehicles: Individuals may keep an automobile, as long as its value does not exceed a certain limit.
4. Benefits: Benefits such as social security, unemployment, veterans and disability payments may be exempt.
5. Property due under a money judgement: Individuals that receive payments following some lawsuits – such as personal injury, wrongful death, or others – may keep this income, up to a certain value limit.
Again, property exempted under these categories may not exceed certain values, though there may be exceptions and extensions in certain situations. The topic of bankruptcy exemptions is very complicated, and some issues are disputed even among experts. For more information on exemptions, see our earlier posts Changes to NY Bankruptcy Exemptions and Federal Bankruptcy Exemptions & NY .
If you have any questions about bankruptcy and would like to speak to an attorney, please call the Law Firm of Vaughn, Weber & Prakope, PLLC at (516) 858-2620 today to schedule a free consultation.
Because the longer you wait to file bankruptcy, the more difficult it may be to save your home.
But the bank might modify my mortgage.
Sure, but what if the bank doesn’t modify your mortgage. While you wait for a potential loan modification – your mortgage arrears and the interest are piling up. This could potentially prevent you from putting forth a confirmable chapter 13 plan.
NY bankruptcy law just got better.
You should at least consult with a knowledgeable bankruptcy attorney to find out how filing bankruptcy can save your home (see our earlier posts Filing Bankruptcy to Save Your Home From Foreclosure and How Can I Use My Ch.7 Bankruptcy to Avoid Foreclosure).
We understand that bankruptcy is not for everyone. That is why we also offer foreclosure defense, debt negotiation, etc. We are simply stating that bankruptcy is an option that should be considered. At The Law Firm of Vaughn & Weber, PLLC, we don’t push our clients to file bankruptcy. We give you all of your options and assist you in deciding which course of action is best for you.
This is not legal advice!
The Law Firm of Vaughn & Weber, PLLC routinely represents homeowners facing foreclosure. We examine each homeowner’s specific situation to determine their best course of action.
We proudly assist residents of Long Island (Nassau county, Suffolk county) and New York City (Queens, Brooklyn, Bronx, Staten Island, Manhattan) with their bankruptcy and foreclosure matters. We are conveniently located in the heart of Nassau County, Long Island, at 393 Jericho Tpke., Ste. 208, Mineola, NY 11501.
Call (516) 858-2620 to arrange a FREE consultation with a bankruptcy and foreclosure attorney!
Some of your options:
1. Do something:
-Call your lender and try to arrange a Loan Modification, Refinance, short sale, or Deed-in-Lieu of foreclosure.
-Loan Modification- A Loan Modification is a permanent/temporary change in one or more of the terms of your mortgage loan. Ideally, this will result in a payment you can afford. (You might able to do this yourself).
-Short Sale- A sale of a house for less money than is owed to the lender. Ideally, the lender agrees to accept the proceeds of a short sale and forgives the rest of what is owed. Some lenders are offering a cash incentive to homeowners if they are willing to short sale their home. You will likely need the help of a R.E. Broker & a Real Estate Attorney.
-Deed-in-lieu of Foreclosure- (May only be available after a failed Short Sale attempt). Ideally, the lender accepts ownership of the property in place of the money owed on the mortgage. You will likely need the help of a Real Estate Attorney.
-Consult with an attorney regarding:
-Foreclosure Defenses- Such as a Lack of standing, TILA violations, RESPA violations etc.
-Bankruptcy- Such as Chapter 13- which is a type of “reorganization” used by individuals to pay all or a portion of their debts over a period of years using their current income. The most important thing about a chapter 13 case is that it may allow you to keep your home if you can make the payments which the bankruptcy law requires to be made to your creditors.
-Deficiency Judgments- Generally, a judgment for the amount a homeowner owes the lender after a house is foreclosed upon and sold by the creditor for less than the actual amount still owed.
-Watch this New York State Bar Association video: http://126.96.36.199/peopleslaw/SaveYourHome.htm
2. Do nothing:
-Walk away (OR)
-Stay in your home until you get evicted.
-Pay or go calculator: http://www.payorgo.com/
We believe most people should consider contesting the foreclosure of their home. We were recently successful in getting a foreclosure action stayed. We hope to get it dismissed, or force the lender to do a loan modification.
Mineola Foreclosure Attorneys
Call The Law Firm of Vaughn, Weber & Prakope, PLLC, at 516-858-2620 to speak with a foreclosure defense attorney and/or a bankruptcy lawyer.