To discharge debts in Chapter 7 bankruptcy, an individual must demonstrate that he or she has very little income to pay off debts. As opposed to the reorganization of Chapter 13 bankruptcy, Chapter 7 is an asset liquidation process, so if you have steady income, you may not qualify. The process typically takes three to six months, and it will remain on your credit history for 10 years.
Student loan debt can be eligible for discharge in Chapter 7. The myth that student loans cannot be discharged is so pervasive that most debtors do not attempt to include them in their bankruptcy case. Although it is more difficult to discharge student loan debt than other types of debt, it is possible.
This myth is partly why such a small percentage of people have student loans discharged in bankruptcy. According to a study of bankruptcy filings, only 0.1% of petitioners tried to have their student loans discharged, but 39% of them succeeded in getting rid of at least some debt. There are several tactics attorneys have used to successfully challenge the enforceability of both private and federal student loans.
False and misleading claims
An attorney can also help you sue for-profit institutions that made false or misleading claims that led you to enroll. One example would be publishing inaccurate post-graduation employment or salary statistics.
Standing and burden of proof
Many successful legal challenges have focused on the lender’s standing to collect on a loan and the lender’s ability to meet their burden of proof. Because many student loans have been transferred and sold multiple times to different entities, servicers do have documentation showing ownership. The common process known as securitization occurs when debts are packaged into assets that investors can buy and sell. One trust can end up holding hundreds of thousands of loans.
In the securitization process, often paperwork is not transferred to the ultimate entity holding the loan. When critical paperwork is missing, these entities cannot present evidence to the court regarding the terms or even existence of the loan. As a result, they cannot obtain judgement against debtors.
By recognizing that the loan servicer has the burden of proof, attorneys have begun to challenge lenders to show evidence that they actually own the debt they are trying to collect. To obtain judgment against a borrower, the burden is on the loan servicer.
In situations with multiple transfers, paperwork is often missing and it is relatively easy for student loan debtors to prevail in court. For this reason, your attorney will likely demand proof of loan ownership from any company that is attempting to collect from you. By some estimates, this kind of paperwork gap affects 10-20% of student loan debts.
Many debts do not meet the Bankruptcy Code’s threshold of a qualified student loan, a status that can exempt it from discharge. Such debts are often incurred to pay ancillary costs, such as those for prep courses, transportation, computer and internet, and living costs above what was published by the university or college for that year.
Illegal debt collection practices
Another route is to challenge a loan servicer’s debt collection practices, as there are strict laws governing debt collection, such as how often they can call you. Do not take aggressive practices as an indication that a company has a good case against you. Sometimes, the harder they try to collect, the weaker their case is.
Certain private loans are relatively easy to get discharged in bankruptcy. For instance, where funds went to ineligible institutions, unaccredited training programs or trade schools, or schools that went out of business.
Your lawyer can also challenge the enforceability of a student loan due to its predatory terms, such as strict default after one late payment, or extremely high interest rates.
Contact our Texas bankruptcy law firm for help with discharging student loan debt
For more information about discharging student loans in bankruptcy, contact an experienced Texas bankruptcy attorney at Marcos D. Oliva, P.C.