The Law Offices of Ken McCartney P.C.

Since Americans are prone to finance education at all levels with government guaranteed student loans, the loans themselves have become a huge business.

The treatment of student loans in bankruptcy is of concern to a large number of potential clients.  Frequently there is confusion about the potential bankruptcy relief available from student loans.  Many Web sites provide information about student loans in general without an emphasis on bankruptcy's effect.  Try a key word: "student loan" search and see.

Since October of 1999, bankruptcy cases commenced under any chapter of Title 11 (Chapters 7, 11 or 13) do not discharge student loans.  Prior to that date bankruptcy filings would discharge student loans that had been in payout for seven (7) years.  Earlier, that time limit had been five years.  

"Student Loans" are those loans guaranteed by the United States or made by a non-profit provider of education.  Some for profit schools (i.e. truck driving schools) are actually for profit businesses and their loans are not protected by non-dischargability status. The BAPCPA of 2005, extended the definition of what constitutes a student loan to basically any loan used for education expanding on the limitation that it be government guaranteed or by a non-profit institution.

The problem with student loans is that ability to repay in the future is not  considered when  the loans are made.  Under that condition there are many people who end up with loans that they just do not have the ability to repay.  Some from abusive over borrowing, some who could not complete the desired education and never reach the hoped for higher earning potential, and some simply because the resulting earning power with the full education did not warrant the borrowing.

Perhaps, in recognition of this, Congress did provide an out.  The judges in the United States Bankruptcy Courts are authorized to discharge student loans in bankruptcy cases of all chapters IF they can be convinced that to repay the loan constitutes an "undue hardship" for the debtor and the debtor's family.  The burden is slightly higher for certain medical student borrowings.  Note that current hardship and future hardship not the good or bad choices as reasons for the loans are the controlling issues. 

The issue of dischargability of a  student loan being discharged has to  be raised in an Adversary Proceeding (a separate law suit in the bankruptcy court) and is conducted there like other civil law suits.  Unlike a bankruptcy case, where relief is automatically available absent misconduct, the judges' discretion  controls the dischargability of Student Loans absent a purely abusive finding on appeal. It would be most difficult to attempt such a proceeding without an attorney.  Currently there is no court filing fee assessed when a bankruptcy debtor files an Adversary Proceeding to determine the dischargability of a debt.  Typically such a proceeding will take between  six (6) and nine(9) months to be heard and involve a trial that lasts  only an hour or two.  The relevant facts center on the debtor's earning capacity, and necessary spending needs.

Ken McCartney has tried a couple dozen  Student Loan Adversary Proceedings.  His success rate is very high with welfare mothers who did not complete their education and cannot afford dental treatment.  The success rate is not so good with a debtor that has income over $2,500 even where the student loans are huge.  Attorney fees for these proceedings range in Wyoming from $550 to around $1,200 and run $500 more in Colorado.  Remember, there are no guarantees.

Sometimes a Student Loan Adversary Proceeding can be settled with attractive payment terms, compromised totals, and or reduced  interest rates even where the whole loan is not discharged.  There is conflicting authority on whether or not a bankruptcy judge can discharge part of a loan or one of many loans and not the others.

I find the William D. Ford Foundation--a purchaser of government guaranteed Student Loans-- a tough adversary and to be a good alternative to most student lenders. The various makers and purchasers of student loans have varying collection practices.  Some are friendly.  Some are decidedly not so friendly.  WDFF has a repayment program that is "needs based" and can involve zero monthly payments for a stressed out borrower, yet provides for a discharge after about 23 years for unpaid balances.  Unfortunately this program reviews a borrowers' finances every year and  changes payment requirements if income changes. This is not exactly a fresh start but a "zero payment" is not much of a hardship.  Many clients choose to file bankruptcy for all other creditors then apply to programs like this for administrative relief of student loan payment burdens.   Click here for access to the William D. Ford Web Site. This office has no connection whatsoever with this federal program. 

There is a case in at least one district which holds that delinquent payments on a government guaranteed student loan can be off set against Social Security benefits.  Which translates into, "even old people are going to be paying student loans." 

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