Did My Bankruptcy Attorney Make a Mistake by Not Getting My Student Loans Discharged?

Question:

Dear Steve,

I was laid off 11/3/2008 with 2 kids in college and the sole financial provider for 3 kids and my wife.

I paid every bill on time through June of 2011 despite being out of work the 1st time for 17 months. I filed chapter 7 in July of 2011. I survived by using my retirement accounts and now owe the IRS AND STATE back taxes and penalty on top of Parent Plus loans of nearly $190,000.

When I used a well know bankruptcy Attorney in Baltimore and asked if we could include the school loans I was told no they will not discharge them. I feel that they didn’t want to bother with it. I assume I am stuck and have no way of revisiting this topic to be discharged.

I have worked steady now for the last 3 years earning about 1/3 of what I was earning in 2008. I owe taxes almost as much as I owe student loans and can’t pay anything on these debts.

I basically live paycheck to paycheck and The sad part about this is that if I worked 3 jobs and 20 hours a day to have a little extra money so I didn’t have to live on edge each week, I would just have to keep living the same way because all the extra money would be required to pay the back taxes so there is no catching up so why work extra to basically run myself into the ground and die? I guess that’s one way to have the loans discharged.

What direction would you recommend I take? Did the attorney do me a disservice for not attempting this in bankruptcy, which by the way was discharged in January of 2012.

Thanks,

Pat

Answer:

Dear Pat,

If these are federal student loans I wouldn’t lose much sleep over that issue. While it is possible to deal with some student loans in bankruptcy and there have been some success stories, those efforts typically required an extra effort above just a routine filing. They require people to enter into an additional court action/suit, called and Adversary Proceeding (AP).

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Most bankruptcy attorneys are reluctant to move ahead with an AP because the cost of filing and processing that separate legal case can be really expensive. So expensive that the client can’t afford the legal fees. That being said, a small number of bankruptcy attorneys have taken on APs and won student loan discharges.

When it comes to federal student loan debt, the Department of Education is trying to put policies in place to make it easier for people to eventually discharge debts in bankruptcy. See this article.

As an example of a success story, read Using This Information, Man Discharges $130K in Federal Student Loans in Bankruptcy.

We are not at the stage yet where the process is really being implemented. It is slowly rolling out but haphazard at best right now. So back in 2012 when you filed, it would have still been a major uphill battle that you most likely could not have afforded to pursue.

I hear you about just limping by and it might be well worth going back to the same bankruptcy attorney and talking to them about a Chapter 13 bankruptcy at this time. You can always talk to a couple of other bankruptcy attorneys to get a second and third opinion about your situation.

The Chapter 13 bankruptcy would give you legal protection and help to eliminate your tax liabilities that first came due more than three years from your filing date. The bankruptcy should also stop interest on all unsecured claims upon the filing of the case. – Source

If the student loans are private student loans then you might want to read how some of those types of loans can be “low hanging fruit” when it comes to a bankruptcy discharge. See These Private Student Loans Can Be Easily Discharged in Bankruptcy.

At the very least, entering a Chapter 13 bankruptcy now would cram your private student loan payments down to what you can afford to pay. Additionally, it would legally stop the student loan company from harassing you during the Chapter 13. The downside is that interest will continue to accumulate on the private student loans during the Chapter 13 bankruptcy and when the case is closed, in about five years, the balances will be higher than what they are now.

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This temporary strategy buys you some time for the bankruptcy laws to better deal with the growing crisis of student loan debts. It’s not a perfect solution but it seems to deal with your most pressing debts at this time.

There are some other possible options when it comes to private student loans. You might want to read Top 10 Reasons You Should Stop Paying Your Unaffordable Private Student Loan.

Sincerly,


You are not alone. I'm here to help. There is no need to suffer in silence. We can get through this. Tomorrow can be better than today. Don't give up.

Damon Day - Pro Debt Coach

3 thoughts on “Did My Bankruptcy Attorney Make a Mistake by Not Getting My Student Loans Discharged?”

  1. I am the person Steve referenced and who successfully discharged my student loans by filing an AP and proving undue hardship. I did it without the help of an attorney. I did not go to trial, and the court was very quick to discharge my debt. YOU CAN “Re-Open” your chapter and file an Adversary Proceeding and proceed to prove “undue hardship”. I offer helpful information on my blog: Undue Hardship-Poverty Required. The link is here: http://www.unduehardship-povertyrequired.com. Steve Rhode is very helpful as well. The impetus is on you however to dig out the information, and learn all you can about what is required to prove undue hardship and represent yourself in court as you will stand a better chance of winning (in my opinion) if you file pro se (without a lawyer) and if you have already reached bankruptcy you probably can’t afford one anyhow! My two cents worth…. Richard Allan Precht

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  2. Pat, what Steve said. In addition for the Adversary Proceeding to be successful in discharging your student loan debts, you really almost have to be permanently disabled or similar, it’s such a strict test. So I think your bankruptcy attorney gave you good advice.

    The National Student Loan Database (http://nslds.ed.gov) is a good place to start so you can see all of your federal student loans in one place. This will give you an idea of how much you owe on these loans.

    If your payments are too high, you have options. You can lower your monthly payments with individual loan servicers. Typically once you gain online access with the institution serving your loan you are given the option to switch from the “standard repayment” plan to an alternative repayment plan. Your loans automatically begin on the standard repayment plan which calculates your monthly payments at a fixed sum to allow you to pay off the loan in ten years.

    Alternatives to the standard repayment plan allow you to reduce your monthly payment by extending the term of the loan.

    There are additional limitations on Parent PLUS loans.

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