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Is It Really Possible My Tuition Answer Student Loans Were Discharged in Bankruptcy?

By on January 23, 2017

Question:

Dear Steve,

I have 3 Tuition Answer loans through Sallie Mae that I was talked into while attending Concorde Career College in Kansas City in 2005. I owe over $66,000 just to Sallie Mae (not mention my federal loans). It’s odd because I was the student but my partner had to co-sign. SHE is listed as the borrower…..isn’t that odd? I was the student. I pay more than half of my salary to student loans and may be laid off in the next few weeks. If so, I may default. I filed for bankruptcy in 2009 but of course my lawyer didn’t touch my student loans.

I’m wondering if these student loans were given to me under false pretenses. These loans weren’t towards my education, the money was given directly to me. I used the money to live off of while going to school full time. Do you know a bankruptcy lawyer in the Kansas City area that could help me? I need relief in the worst way!

Heather

Answer:

Dear Heather,

Wow, those are really problematic loans that certainly are up for a possible discharge for a number of reasons.

I also ran your situation past attorney Austin Smith who has done a lot of research in this area. Here is what he said.

“Regardless of any potential false pretenses, it’s very likely that your Tuition Answer loans are dischargeable, and thus were discharged in your bankruptcy in 2009. However, it’s impossible to say for certain without reviewing your total federal loan borrowing history and your “Cost of Attendance” at Concorde. Also understand that because you have a co-signor (or co-borrower as it seems), she will remain liable on the loans despite any discharge for you. I’d be happy to look at your documents if you want to reach out to me directly.”

Austin alludes to the issues surrounding these loans. While so many people continue to insist private student loans are not dischargeable in bankruptcy, that’s just not true.

From what you shared it sounds very likely the loans you have might not be able to be validated, were used for expenses outside of protection, and might have actually been discharged in your original bankruptcy. If so, you could be eligible if they attempted to collect on the loans or ask you for payment afterwards.

I think you should read this and this.

You should take Austin Smith up on his offer to help as a first step. After you talk to him, come back and post an update for me in the comments below and we can take it from there.

I also ran your situation past law professor Richard Fossey. Here is what he had to say:

“I’m Richard Fossey, a university professor who writes and researches on the topic of student loans.

Here are my thoughts.

First, you mentioned that you filed for bankruptcy in 2009. You should check and determine when you can file again. There is an 8 year waiting period.

Second, you mentioned that you think you may have an argument that your were fraudulently induced to enroll at Concorde Career College. I think courts are beginning to become educated about fraud by for-profit colleges, so this is definitely something you should emphasize if you file for bankruptcy. Also, the Department of Education has a so-called “Borrower Defense” process that allows students to apply for federal student loan forgiveness based on evidence that they were induced to enroll through fraud. DOE is not processing these claims very fast, but I think it is in your interest to file.

READ  When Will My Sallie Mae Tuition Answer Loans Become Uncollectible?

Third, if you file for bankruptcy, you will have to meet the “undue hardship” standard because that test applies to both federal and private loans. Most circuits follow the Brunner test for determining whether you meet the undue hardship standard. The Brunner test has three parts: 1) Can you maintain a minimal standard of living and still pay on your loans? 2) Are there additional circumstances that indicate you won’t be able to pay off the loan in the future? 3) Did you deal with your student loans in good faith?

In the past, the courts have applied the undue hardship standard pretty harshly, but some courts have begun to rule more compassionately. For example, the good faith standard generally requires the debtor to show that she made some payments on the loans or tried to negotiate modified loan terms. But in the Roth decision, a decision by the 9th Circuit Bankruptcy Appellate Panel, the court ruled that a debtor in her 60s living on Social Security met the good faith standard simply by living frugally and trying to maximize her income even though she never made a single voluntary loan payment.

There are a host of factors that the courts consider in student-loan bankruptcies, including the debtors’ age and health, disability status, job prospects, payment history, etc. But here are my thoughts about your predicament:

What have you got to lose by filing bankruptcy and filing an adversary action to get your student loans discharged?

I believe, however, you should know before deciding to file that it is difficult to find an experienced attorney to represent you in an adversary proceeding. Here are the impediments:

1) Most bankruptcy attorneys do not keep up with the student-loan bankruptcy cases, and they may believe it is impossible to discharge student loans in bankruptcy.
2) You are probably broke and don’t have the money to pay an attorney to represent you in court.

Some people have filed adversary actions without attorneys and have been successful. A well-known law review article analyzed bankruptcy cases for one year and the author concluded that people did about as well in court without an attorney as people who were represented by lawyers.

I would say this, based on my talks with people who have filed adversary actions to discharge their student loans:

First, you must have the mental stamina to deal with the creditors’ lawyers, who are well financed and skilled in wearing people down.

Second, you should have all your evidence gathered before you file and you should be able to explain in your complaint how you meet the undue hardship standard.

Third, you must educate the bankruptcy judge in your trial brief about the recent favorable decisions.

READ  Is It Possible My Tuition Answer Student Loans Were Discharged in My Bankruptcy?

It sounds like your loan payments are truly burdensome, but the creditors will argue that you should be put into a long-term income-driven repayment plan that will reduce your monthly payments but extend the payment terms for as long as 20 or 25 years.

But some federal courts have rejected that argument, pointing out that at least in some cases it is pointless to put a debtor in a 25 year repayment plan. Also, often the monthly payments are so low that the payments don’t cover accruing interest and the debt just grows larger even when the debtor makes regular payments. In such cases, it is truly pointless to put people in these long term income-driven plans. Also, some courts have taken note of the psychological costs that people pay if they are put in long-term student-loan repayment plans.

This may not be encouraging news to you, but I would like to add that I think the courts are beginning to realize the magnitude of the student-loan crisis and I believe at least some courts will rule in favor of bankrupt debtors if the facts are right. New information has been made public just in the last couple of months that shows just how large the student-debt mess is. And this news may be helpful to people like you.

I should add that although I have an inactive law license in Texas, I haven’t practiced law in many years; and I can’t give you legal advice. But speaking as a professor who has studied the student-loan crisis for a long time, I think everyone who is truly burdened by student loans should consider filing bankruptcy. I can’t really add anything else without knowing more about your personal circumstances.

One final thing to consider. You may have signed an arbitration clause when you enrolled at Concorde. If you did, and you sue Concorde directly for fraud, Concorde will almost certainly ask the judge to send you to arbitration. I can’t say whether going to arbitration over a fraud claim would be good for you. A lot of commentators have argued that arbitration tends to favor the corporate party because the arbitrators want to be chosen to serve again and they know the corporate party will be defending more claims in the future.

In closing, let me say I am very sorry that your partner co-signed your loan because your partner can’t discharge the loan in bankruptcy without meeting the undue hardship test–the same test that applies to you.

Good luck! I blog regularly on the student-loan crisis. You can follow my comments at condemnedtodebt.org

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About Steve Rhode

Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.

3 Comments

  1. Austin

    January 23, 2017 at 4:51 pm

    Helped answer.

  2. Heather

    January 23, 2017 at 4:50 pm

    Question asked.

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