Tag: student loans

exceptions to bankruptcy discharge 523

Bankruptcy Discharge Exceptions of 523: Explained in Simple Terms

Bankruptcy Discharge Exceptions of 523: Explained in Simple Terms

In bankruptcy, debt is discharged unless there’s an exception that makes it nondischargeable. That’s the rule: all unsecured debt is eliminated in bankruptcy unless the exception is in Section 523 of the Bankruptcy Code. What kind of things are listed there? You can guess: recent taxes, most student loans, and so on. Here’s a look at the the bankruptcy discharge exceptions of 11 USC 523.

The statute: 11 USC 523(a)

The rule is all unsecured debt goes away in bankruptcy, and 11 USC 523(a) is the list of exceptions to the rule. In some cases, there are exceptions to the exceptions. That is, the list below is not absolute; sometimes debts in 523a can be discharged in bankruptcy.

Before launching into the long list, Section 523(a) of the Bankruptcy Code says:

A discharge under section 727, 1141, 1192 [1] 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt:

That’s the preamble. It basically says that a discharge in Chapter 7 bankruptcy, Chapter 13 bankruptcy, Chapter 11 or Chapter 12 bankruptcy doesn’t eliminate the following debts.

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student loan forbearance ends 2022

Student Loan Payment Pause Extended: Deferment Thru June 2023

Student Loan Payment Pause & Deferment Extended thru June 2023

Student Loan forbearance and payment pause extended to July 2023; there are still options

November 2022 update: The student loan payment pause has been extended again, for the sixth time, to June 30, 2023.  The pause may end and payments resume if lawsuits are resolved first. If the June 30 2023 student loan pause lapses without litigation being resolved, payments will resume 60 days after that. Also big news in Nov 2022: the Biden Justice Department (DOJ) has announced new guidance which will make it easier to discharge student loan debt in bankruptcy.

April 2022 update: The student loan payment pause was set to end May 1, 2022, but the Biden administration extended it through August 31, 2022.  It was previously set to end on May 1, 2022. Since March 2020, millions of student loans were given forbearance and deferment with no payments due, interest stopped accruing, and there have been no collections against those in default due to the student loan payment pause.

Now, all that student loan relief changes back to normal on Sept 1, 2022.

Continue reading “Student Loan Payment Pause Extended: Deferment Thru June 2023”

open door to easier bankruptcy forgiveness of student loans

Student Loan Forgiveness in Bankruptcy: Top Keys for DOJ Guidance

Explaining DOJ Guidance on Student Loan Forgiveness in Bankruptcy

Bankruptcy attorney explains new DOJ guidance from the Biden Justice Department to make it easier to get student loan forgiveness in bankruptcy

Yesterday, the Justice Department announced a new plan for student loan forgiveness in bankruptcy. The change could make it easier for people to eliminate — or “discharge”– student loan debt and to finally achieve student loan forgiveness and a fresh start in bankruptcy. Here is what it all means.

Continue reading “Student Loan Forgiveness in Bankruptcy: Top Keys for DOJ Guidance”

fresh start through bankruptcy act of 2021 bankruptcy for student loans

Fresh Start Through Bankruptcy Act of 2021: Student Loan Reform

Fresh Start Through Bankruptcy Act of 2021: Bankruptcy for Student Loans

Student Loan forgiveness may be an option soon in bankruptcy

2022 update: Fresh Start Through Bankruptcy Act of 2021 is still in committee, and nothing appears to be happening with it. However, the Biden administration just gave the Justice Department and Department of Education guidance to make it easier to discharge student loans in bankruptcy. Unlike the FSTBA, the Biden plan doesn’t require anything of the new Congress.

The Fresh Start Through Bankruptcy Act of 2021 was introduced into the Senate this week. What’s startling about this is that it’s a bipartisan bill, helping its future.  The impact of the Fresh Start bill (or FSTBA) is that it would provide student loan forgiveness in bankruptcy.  Bankruptcy for student loans hasn’t been an option for decades now, being a massive burden. This student loan bankruptcy reform would change that.

Bill Summary

If the Fresh Start bill becomes law, it would eliminate student loan debt in bankruptcy for those  student loans that were first due ten years prior.  The undue burden test would apply for those newer than ten years. It’s still going to be tied to the means test, making a Chapter 13 a good solution for those who can afford to pay some, but not all.

In short,  bankruptcy for student loans is on the table. But as of August 2021, student loan reform is still in the future. Write or call your senator and if/when it passes, contact your member of Congress. The Fresh Start bill still needs to become enacted into law. Now that student loan forbearance is set to end in 2022, perhaps Congress can get busy on this.

Deeper Dive into FSTBA

If you’re interested to learn more about the text of this student loan forgiveness bill and more precise information how it would work, I did a much more detailed write-up on the Fresh Start Through Bankruptcy Act of 2021 here.

 

 

 

modern debtors prison

Modern Debtors’ Prison: Why We Need Student Loan Reform Now

Modern Debtors’ Prison

Why We Need Student Loan Reform Now

2022 update: The Biden administration recently announced a process to ease up student loan forgiveness in bankruptcy. There’s a student loan bankruptcy bill active in the Senate which would provide student loan forgiveness, and meaningful student loan reform.


A long time ago, in the days of Charles Dickens and chimney sweeps, people were incarcerated until they satisfied their debts. These debtors’ prisons resulted in a Catch-22. You can’t get out of jail until you paid your debts. And you can’t pay your debts until you get out of jail. There’s now a new modern debtors’ prison.

The New York Times recently had a piece describing a new program to enforce debt. If someone falls behind on their student loan payments, they can lose their professional license and their job. Without income, this guarantees only one thing: debtors for sure won’t be able to pay their student loans.

 [I]n 19 states, government agencies can seize state-issued professional licenses from residents who default on their educational debts. Another state, South Dakota, suspends driver’s licenses, making it nearly impossible for people to get to work.

Student Loans are the Problem, not Debtors

debtors prison
We’ll set you free once you pay your debt.

It’s bad enough that student loans are the second highest kind of household debt, after mortgages. There are a lot of reasons for this. Firstly, the federal government subsidizes the Big School industry. The government encourages high tuition costs by guaranteeing them with programs like Direct Loans. If payments aren’t made, Uncle Sam can seize a tax refund, bank accounts, garnish wages, and seize other assets. And bankruptcy court isn’t a safe haven for the graduate with unaffordable student loans, as education debt isn’t dischargeable.

Big Education is an Overpriced Service Churning Out Poor Product

Overpriced

Because tuition costs are subsidized by government and a loan industry, there are disincentives for schools to compete in the open market. Let’s face it, if you knew you could sell a glass of lemonade for $1000, that you could get people to go into hock for it, and get Uncle Sam to use his muscle to help collect, why would you ever settle for only get 25 cents a glass? Especially if your competition had the same guarantees?

Colleges are not encouraged to compete with each other in the market to be the most affordable. Since there’re no market forces in play. The average student leaves school owing almost $40,000. Schools get the tuition paid from the government. The government can get it from you. As a result, very few can pay their way through school. Over 70% of graduates leave college with debt, starting their new career with a burden on their back.

More Competition for Jobs

Because everyone is encouraged to go to college, standards for getting into college are getting lower. Schools have an incentive to admit as many people as possible. Students are sold a bill of goods and pot of gold on the other side of graduation. As a result, more and more people are getting into college, leading to more competition for jobs once they graduate.

The Student Loan Bubble

Consequently, there is a student loan bubble, or student loan crisis. More and more graduates are in the job market leading to a saturation, some settling for lower-paying jobs, causing more and more unable to pay for their student loans.

The schools aren’t lowering the costs; why should they? Universities win, because they can charge whatever they want, independent of market forces. The government wins because it knows it can collect this debt because the graduate can’t ever escape from it.

The optimistic incoming student isn’t comparing costs as much as they look at school prestige, or maybe how well-known its sports programs are. They think they win. That is, until they graduate. Then they realize that maybe they can’t find a good-paying job as easily as hoped, or the job they could find pays much less than needed to make ends meet.

Faced with a choice between paying the student loan or paying rent and food, they choose the necessities. So they let the student loans go.

A solution is to reduce the payments for the student loans, and (cut future tuition costs). Another idea is to get the government out of student loan business. Yet another fix is to do all they can to bring the wayward sheep back into the fold. To increase forgiveness programs that waive interest and penalties to get the student loan out of default.

We Need Bankruptcy Reform on Student Loan Debt

Under 11 U.S.C. 523(a)(8) of the Bankruptcy Code, student loan debt is not discharged in bankruptcy. There are rare instances where it can be discharged, but the exception is so narrow as to hardly exist.  “Undue hardship” requires a showing that the debtor is mostly dead, and even that isn’t always good enough.

We need student loan reform of the bankruptcy code. Student debt reform is needed in bankruptcy so that more people can discharge their school debt.  What good is bankruptcy to the consumer debtor is the second largest form of debt is untouched by bankruptcy? Lower the bar a bit, so that after, say, five years after graduation if the student isn’t earning the median income, the schools don’t get paid the tuition. Imagine what that would do to admission rates.

License-Pulling Makes Repayment Less Likely, Not More

The government should be enacting change that makes it more likely the defaulting graduate can pay their student loans. It should not cutting the source of income. We’re through the looking glass to believe that if you don’t pay your bills we’ll take away your job so you can’t pay your bills. The license-pulling job-killing measure that’s spreading only ensures the jobless graduate earns less income. It makes it more likely they’re dependent on government programs. Finally, it puts defaulting graduates in a modern debtors’ prison that says they’ll get their license to earn money back as soon as they give enough money to pay their debt.