I was privileged to be part of a panel on student loan
issues at the American Bankruptcy Institute seminar
Student Loan Bankruptcy Law
Even though bankruptcy law is federal law, it is not the same everywhere.
Federal courts are divided into Circuits. I am in the 6th, Michigan, which also includes Ohio, Kentucky and Tennessee.
Our circuit goes by the Brunner test for discharging student loans in bankruptcy. And, it allows partial discharge of student loan debt, so, if the court finds you can afford to pay half, the other half of your student loan debt is discharged.
The 7th Circuit, Illinois, Indiana and Wisconsin, ostensibly follows Brunner, but, holds that to discharge student loan debt you must show a “certainty of hopelessness”. And, it does NOT allow partial discharge, all or nothing.
Why Even Try?
(to discharge student loan debt in bankruptcy court) was the title of my materials for the presentation.
Seminars are great, helps me learn new things all the time.
PSLF, or Public Service Loan Forgiveness, was set up in 2007 so that those working in certain non-profit areas could get the balance of their student loan debt discharged after paying for ten years.
Now, you would think that this would apply to the student. But it does not. So, if the parent signed the loan, and the parent is working a qualified job, the parent can get PSLF. Even though the actual student loan money went to the kid who is NOT working for a non-profit.
Space prohibits me from going into detail on my other stuff, but, the creditor has the burden of proof that the student loan is, a student loan, within the meaning of the bankruptcy code. If not, it is discharged just like any other loan.
And, you can get better settlements after filing an adversary proceeding to discharge student loan debt, than on your own working directly with student loan lenders/servicers.
Best thing I learned: you can write a settlement so that any discharged balance is discharged per the bankruptcy discharge. So, there would be no taxable debt forgiveness income.
Another student loan bankruptcy issue sweeping the nation is Chapter 7 trustees, suing parents, for paying their kids’ tuition, with student loan money. This has been held by some bankruptcy courts to be a fraudulent transfer, and they have allowed the trustee to get this money back, if paid within 6 years of the bankruptcy filing.
Worse, the tuition is then owing, and you have to pay the college twice.
It is, if you have student loan questions, contact me.