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Student Loan Law: 15.7.7.4.1 The borrower’s present financial circumstances

The “Guidance for Department Attorneys Regarding Student Loan Bankruptcy Litigation”634 (the guidance) finds that the Brunner635 and “totality of circumstances”636 tests incorporate similar standards for assessment of undue hardship.637 In doing so, the guidance glosses over differences between the two standards and essentially establishes guidelines for application of the three prongs of the

Student Loan Law: 15.7.7.4.3 The borrower’s past good faith

The “good faith” standard focuses on the borrower’s past “actions relative to their loan obligation” and considers whether the borrower made good faith efforts to repay their student loan debt.653 As described in § 15.4.2.3, supra, application of the “good faith” standard under the third Brunner prong has been fraught.

Student Loan Law: 15.8 Discharge of Student Loans Owed to State Agencies

Following the Supreme Court decision in Seminole Tribe v. Florida, state agencies collecting student loan debts aggressively asserted Eleventh Amendment immunity (sovereign immunity) as a way of barring debtors from discharging student loans in bankruptcy.671 The issue of sovereign immunity arises because debtors must affirmatively seek student loan discharges through an adversary proceeding.

Student Loan Law: 15.9.1 Introduction

If a student loan cannot be discharged based on undue hardship in a chapter 7 or 13 case, there are still strategic advantages to filing a chapter 13 bankruptcy.698 One advantage is that the borrower’s chapter 13 plan, not the loan holder, determines the size of a borrower’s loan payments. For the three- to five-year life of the chapter 13 plan, the plan will determine how much the borrower pays each unsecured creditor, including student loan creditors.

Student Loan Law: 15.9.3 Separate Classification of Similar Claims Is Permitted in Chapter 13 Bankruptcy

One way to pay more toward the student loan than to other unsecured debts is to classify the student loan creditor separately so that it receives a higher percentage of the disbursements from plan payments than the other unsecured creditors. For example, the plan might provide that the student loan creditor will be paid 80% of what it is owed over the five years of the plan. The other unsecured creditors may receive only 20% of what they are owed.

Student Loan Law: 15.9.5 Cure of a Default on a Long-Term Student Loan Debt in Chapter 13 Bankruptcy

In those jurisdictions where it is difficult to obtain approval of separate classification for student loan debt, a useful alternative is to cure a default on the student loan pursuant to 11 U.S.C. § 1322(b)(5). This section permits the chapter 13 debtor to “cure a default and maintain payments on long term debts on which the final payment is due after the final payment of the plan.” This definition clearly applies to any student loan with scheduled payments that will be due after the end of the chapter 13 plan period.

Student Loan Law: 15.9.6 Chapter 13 Plans May Provide for Participation in Long-Term Income-Driven Repayment Plans

A chapter 13 plan can provide expressly for participation in a long-term repayment plan, certifications for renewals, and procedures for addressing changes in payments during the life of plan.751 Prior to 2015, the Department of Education and its guaranty agencies and servicers placed all student loans for chapter 13 debtors in administrative forbearance. This prohibited collection actions, but did not stop accrual of interest. Accrual of interest during a three-to-five year plan can devastate a debtor’s fresh start.

Student Loan Law: 15.9.7 Preferential Treatment Allowed for Debts with Co-Signors

Section 1322(b)(1) of the Code contains two distinct clauses. The first clause allows the debtor to designate a class of unsecured claims for favorable treatment, provided that the favored classification does not discriminate unfairly against other unsecured claims. The second clause of section 1322(b)(1) creates a specific exception to this general rule.

Student Loan Law: 15.9.8 Graduated Payment Structures for Student Loans in Chapter 13 Plans

Another approach might be to establish a five-year plan, not to separately classify the student loan for the first three years of the plan, and then to classify it for greater payment during the plan’s final two years.780 The basis for this approach is the Bankruptcy Code provision that requires disposable income only to be paid out over three years.781 Any amount that creditors receive in the final two years would be a bonus in any event.

Student Loan Law: 15.9.9 Over-Median-Income Debtors May Designate All Their Discretionary Income for Student Loan Payments

The means testing calculation can work to the benefit of an above-median-income chapter 13 debtor who wishes to continue making regular payments on a nondischargeable student loan.784 This was the conclusion of the bankruptcy court in In re Orawsky.785 Based on her Form 22C, the debtor in Orawsky had a negative monthly disposable income. However, according to her income and expense schedules (I and J), she had $104.83 in disposable monthly income after expenses.

Student Loan Law: 15.12 Challenging Aspects of the Debt in Bankruptcy in the Absence of a Proof of Claim

Because bankruptcy courts have authority to determine the dischargeability of student loan debts, they can make these determinations even when the creditor has not filed a proof of claim in a bankruptcy case.815 Most consumer chapter 7 filings result in what are deemed “no-asset” cases. Because no non-exempt assets are available for liquidation in these cases, creditors do not file proofs of claim.

Student Loan Law: 15.11.3 Challenges to Fees and Costs

For students who are confronted with unlawful or excessive interest and collection fees or the incorrect crediting of payments by loan servicers, this process also provides an opportunity for the student to challenge the amount owed on the student loan. A student loan creditor is bound by a determination disallowing collection costs as part of its claim in bankruptcy regardless of whether the student loan debt is nondischargeable.

Student Loan Law: 15.14 Student’s Rights After Bankruptcy Discharge

If there has been a judicial determination that a student loan is discharged in bankruptcy, the debtor is no longer liable for the obligation and is protected from any attempt to collect the debt.855 The lender should not accept any further payments on the loan, such as payments the lender may receive through a tax intercept program or even those voluntarily made by the debtor.

Student Loan Law: 15.15 Bankruptcy Default Clauses in Private Student Loan Agreements

Private student loan contracts are typically co-signed and provide that the filing of bankruptcy by the borrower or any co-borrower is an event of default that will trigger acceleration of the loan. These contract provisions are routinely enforced by private student loan creditors upon the filing of a bankruptcy, even if the non-filing borrower is current on the loan and intends to continue making payments.

Student Loan Law: 15.1.1 Introduction

Discharging student loans in bankruptcy is an important strategy for low-income consumers, either through a chapter 7 (“straight”) or a chapter 13 (“wage earner plan”) bankruptcy filing.1 Although the 2005 amendments made bankruptcy a more cumbersome process for debtors, it is still an option consumers struggling with debt may consider.2 In addition, even when a student loan cannot be discharged in bankruptcy, a chapter 13 bankruptcy filing offers other important options for the student loan borrower.

Student Loan Law: 15.1.2.1 The Automatic Stay

An advantage of bankruptcy is that filing a chapter 7 or chapter 13 petition instantly protects the student from most collection actions on claims arising before the bankruptcy.