Question:
Dear Steve,
I am going to provide a timeline of events and circumstances leading up to my current situation. I apologize if it’s too long but I think the circumstances are important to my case for loan discharge and I desperately need advice:
2009-2012: Attended the Illinois Institute of Art – Chicago (a branch of the Art Institutes embroiled in the fraud/accreditation/predatory lending scandal).
2011: Only family member (mother — father deceased, only child) is plunged into a violent situation in which her life and mine are in imminent danger for a prolonged period of time. This causes obvious distress but I remain enrolled in school.
2012: Due to stress caused by family turmoil, legal proceedings, and an increasing financial need to support a parent who has now become a dependent (diagnosed PTSD, bipolar, and is now homeless), and faced with issues of school now possibly losing access to federal aid/grants, I withdraw from classes.
2013-2014: Working low paying jobs, still supporting dependent, I decide to try to finish school at the Art Institutes in hopes of raising my income with a degree. I’m informed that I have no federal aid left. I am over $50,000 in debt with no hope of a personal loan and no possibility of a parent loan or cosigner and am still considered a dependent student.
2015: I turn 24 and am now an independent student. I relocate to North Carolina where an aunt had been able to temporarily care for my mother, and resume her care. I have been working assorted unskilled jobs since leaving school and living consistently at or below the poverty line, but have kept my student loans in good standing through deferment and having made one $179 payment. I enroll in a local community college, desperate to get a degree and hoping that I can receive more federal aid as an independent student. Not only am I still maxed out, but I learn that not a single credit will transfer — including general education credits — out of AI, which is supposed to be accredited. I also still cannot secure a loan.
2016: I get the maximum Pell Grant amount and have paid the rest out of pocket for four semesters while working in a restaurant full time and continuing to support a dependent. I’ve dug myself deeper into debt, using credit cards to pay for tuition and supplies along with other necessary living expenses for my family in hopes that I would be able to somehow keep working towards earning at least a bachelors degree and a higher income. My mothers condition has not improved and she is involved in a lengthy appeals process in response to a denial for SSI, in addition to the fact that she is now turning 60.
I will never in my lifetime be able to repay the amount I owe for credits that I didn’t receive, and in fact will become poorer with each passing year. Because I am ineligible for any more federal aid, I am also simultaneously blocked from furthering my education and raising my wage in the future. Even in the event that I can eventually secure a private education loan, the interest rates for a person in my situation will be high and the total amount of debt will skyrocket, just prolonging this exact bankruptcy plea.
Do you think that my circumstances could pass the three prongs of the Brunner Test? Would the fact that I’ve kept my loans out of default for 4 1/2 years, made a payment, and am currently enrolled in school be enough to satisfy the “good faith” standard? There’s no way I can afford a lawyer and will have to go at this alone. Is it a shot in the dark? Your website has honestly already been a godsend. I never even knew that this was an option before. Thank you so much for what you do.
Leslie
Answer:
Dear Leslie,
Tackling student loan debt in bankruptcy requires you to file essentially a lawsuit against the lenders in addition to your bankruptcy filing. The lawsuit is called an Adversary Proceeding (AP). Some people have been successful in filing their own AP. But it’s not a guarantee of success. You should expect pushback even though the policy of the Department of Education is to take a gentler approach.
This guidance from the Department of Education provides some additional information about how they should evaluate the undue hardship formula.
I see you’ve already caught on to the Brunner Test but that is not the only approach to dealing with federal student loans in bankruptcy. Another approach in some areas is the totality of circumstances approach.
I so wish I had a crystal ball to tell you exactly what will happen if you file bankruptcy and your own AP to attempt to get your federal student loans discharged. The one thing I’ve observed about the law is while there are often clear rules about how things should be dealt with, it doesn’t always go that way.
It seems there are two issues here. The first is you say you are no longer eligible for more federal student loans. I’m not sure exactly why that is. It does appear that you may be near the edge of your eligibility for Federal Pell Grant funds which are limited to no more than 12 semesters. But a Pell Grant does not need to be repaid so I’m back to the idea you may have had both loans and Pell grants.
So let me proceed assuming you do have some federal student loans that do need to be repaid. Pursuing bankruptcy to get yourself back on a level financial foundation is a reasonable and logical thing to do. It would eliminate all that other debt you acquired to help make ends meet and hopefully without that debt you would be able to make ends meet moving forward.
At the bottom of this post there is an infographic about student loan eligibility.
There is no downside to taking a swing at the AP in a bankruptcy filing but both the bankruptcy and especially the AP involve often complex federal law and it would be easy to miss something or potentially shoot yourself in the foot. While some have done this successfully, I’m always a fan of hiring an experienced attorney to represent you.
But I’m wondering why you have not just dropped your federal student loans into a Direct Consolidation Loan and then opted for an income driven repayment plan. Based on your situation, your monthly payment could be as low as zero dollars a month, get you current, and you would remain eligible for more federal student loans. After 20-25 years your loans would be forgiven. And if you landed a job with the government or a non-profit, your full student loan debt could be forgiven tax-free after 120 months of low or zero payments on an income driven program.
These income based repayment programs can have sad consequences when the person not be suited, enrolls. See this post. But if the expectation is your required monthly payment will only go up as you income goes up, then it is something to consider. Don’t get me wrong, the income driven programs have some serious flaws but they also have benefits for people in similar situations.
One of the arguments made in previous APs filed by representatives of the Department of Education is that the income driven programs are available and would result in no payment. Sometimes that is the route these cases take and other times a discharge is granted.
But as tragic as your past experiences have been, I’m not sure it is the best story for a discharge effort. Observations show people who are older, have an underlying chronic medical issue, and are unlikely to be able to increase their income in the future are the most likely to obtain a discharge.
For more information on who has been successful in discharging federal student loans in bankruptcy, click here and here.
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Dear Leslie, Steve Rhode was very helpful and encouraging to me before, during and after I filed my Adversary Proceeding as part of my Chapter 7 personal bankruptcy last year. I did not have an attorney and I won a full discharge of nearly $130,000.00 without a trial in Federal Court in Alexandria, VA just a few miles from the Washington D.C. Dept of Education’s office!
I continue to offer help and advice to others like myself who have reached the point of no return with student loan debt. I offer help on my personal blog site: http://www.unduehardship-povertyrequired.com. Steve Rhode has re-published many of my articles on his site, and I so appreciate his hard work. If I can be of help follow me on my blog and comment there and I will get back to you! Again Steve has been a great friend and help to me and I am happy to call him a friend! God Bless America! Richard Precht, Minn, MN