The Law Offices of Ken McCartney P.C.

Student Loans



Since Americans are prone to finance education at all levels with government guaranteed student loans, the loans themselves have become a huge business.

The treatment of student loans in bankruptcy is of concern to a large number of potential clients.  Frequently there is confusion about the potential bankruptcy relief available from student loans.  Many Web sites provide information about student loans in general without an emphasis on bankruptcy's effect.  Try a key word: "student loan" search and see.

Since October of 1999, bankruptcy cases commenced under any chapter of Title 11 (Chapters 7, 11 or 13) do not discharge student loans.  Prior to that date bankruptcy filings would discharge student loans that had been in payout for seven (7) years.  Earlier, that time limit had been five years.  Early on after the Code was adoptedin 1999 Chapter 13 discharged student loans, but that disappeared in the 1980's.

Prior to 2005, "Student Loans" were those loans guaranteed by the United States or made by a non-profit provider of education. As of October, 2005, the definition of Student loans was expanded to include all loans made to students.   The BAPCPA of 2005, extended the definition of what constitutes a student loan to basically any loan used for education expanding on the limitation that it be government guaranteed or by a non-profit institution.

The problem with student loans is that ability to repay in the future is not  considered when  the loans are made.  Under that condition there are many people who end up with loans that they just do not have the ability to repay.  Some from abusive over borrowing, some who could not complete the desired education and never reach the hoped for higher earning potential, and some simply because the resulting earning power with the full education did not warrant the borrowing.

Perhaps, in recognition of this, Congress did provide an out.  The judges in the United States Bankruptcy Courts are authorized to discharge student loans in bankruptcy cases of all chapters IF they can be convinced that to repay the loan constitutes an "undue hardship" for the debtor and the debtor's family.  The burden is slightly higher for certain medical student borrowings.  Note that current hardship and future hardship not the good or bad choices as reasons for the loans are the controlling issues. 

The issue of dischargability of a  student loan being discharged has to  be raised in an Adversary Proceeding (a separate law suit in the bankruptcy court) and is conducted there like other civil law suits.  Unlike a bankruptcy case, where relief is automatically available absent misconduct, the judges' discretion  controls the dischargability of Student Loans absent a purely abusive finding on appeal. It would be most difficult to attempt such a proceeding without an attorney.  Currently there is no court filing fee assessed when a bankruptcy debtor files an Adversary Proceeding to determine the dischargability of a debt.  Typically such a proceeding will take between  six (6) and nine(9) months to be heard and involve a trial that lasts  only an hour or two.  The relevant facts center on the debtor's earning capacity, and necessary spending needs.

Ken McCartney has tried a couple dozen  Student Loan Adversary Proceedings.  His success rate was very high with welfare mothers who did not complete their education and cannot afford dental treatment.  The success rate is not so good with a debtor that has income over the minimum wage and any hope for betterment,  even where the student loans are huge.  Attorney fees for these proceedings range in Wyoming from $1,500 to around $5,500 and run $1,000 more in Colorado.  Remember, there are no guarantees.

Sometimes a Student Loan Adversary Proceeding can be settled with attractive payment terms, compromised totals, and or reduced  interest rates even where the whole loan is not discharged.  There is conflicting authority on whether or not a bankruptcy judge can discharge part of a loan or one of many loans and not the others.

I find the William D. Ford Foundation--a purchaser of government guaranteed Student Loans-- a tough adversary and to be a good alternative to most student loan borrowers. The various makers and purchasers of student loans have varying collection practices.  Some are friendly.  Some are decidedly not so friendly.  WDFF has a repayment program that is "needs based" and can involve zero monthly payments for a stressed out borrower, yet provides for a discharge after about 23 years for unpaid balances.  Unfortunately this program reviews a borrowers' finances every year and  changes payment requirements if income changes. This is not exactly a fresh start but a "zero payment" is not much of a hardship.  Many clients choose to file bankruptcy for all other creditors then apply to programs like this for administrative relief of student loan payment burdens.   Click here for access to the William D. Ford Web Site. This office has no connection whatsoever with this federal program. 

There is a case in at least one district which holds that delinquent payments on a government guaranteed student loan can be off set against Social Security benefits.  Which translates into, "even old people are going to be paying student loans." 

In the last few years Wyoming and Colorado bankruptcy judges have taken the position that the availability of the "needs based repayment program" in the William D. Ford Foundation removes the "undue" from hardship and the judges in these two districts have become much more reluctant to discharge student loans.  the existence of a  program where a borrower with no ability to repay does not have to make current payments plays heavily in the judicial decision making process.  The courts reason that no payment being required is not an undue hardship.  The borrowers argument that the presence of a large delinquent loan causes the denial of credit privileges which is an undue hardship has not been convincing.

At this time this office would recommend a student loan adversary to only the most permanently down trodden poverty level worker who is in a stable unchangible situation. 

Unemployed?  For get it.  People find jobs and that ray of hope prohibits the requisite judicial finding of permanent inability.

There is an affidavit  forgiveness program for the permanently disabled, that the Social Security Administration  can provide for recipients of permanent disability benefit awards.


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