In order to discharge a student loan in bankruptcy, you must prove that it presents an "undue hardship." As a part of doing this, bankruptcy courts have required that one element is a showing of a good-faith effort to repay the loan. But what does that mean? How do you prove a good faith effort? Fortunately, the Department of Education has some guidelines and examples for federal loans.
What is Considered a Good Faith Effort?
The Education Department is trying to create an objective standard for proving this, some generally accepted ways to show good faith. Some exmples are:
- Making a payment (the more you have made the better)
- Applying for a deferment or forbearance (other than in-school or grace period deferments)
- Applying for an Income Driven Repayment (IDR) plan
- Applying for a federal consolidation loan
- Responding to outreach from a loan servicer or collector
- Engaging meaningfully with the Department of Education or their loan servicer regarding payment options, forbearance and deferment options, or loan consolidation
- Engaging meaningfully with a third party you believe would assist themin managing your student loan debt
- Efforts to obtain (better) employment, maximize income, and minimize expenses
The more of these that apply to you the better. As to applying for an IDR, failing to do so does not sink your efforts. U.S. attorneys are being instructed to accept any reasonable explanation or evidence supporting any non-enrollment.
Again, they are going for an objective standard. Their attorneys are being told that they can't impose their values on your life choices. In other words, they can't reject what you did because they wouldn't have done that. At the same time, your choices cannot have created the hardship. You cannot have abused the system or demonstrated a lack of interest in repaying the loans.
Also bear in mind that these guidelines don't change the bankruptcy code; they merely advise the U.S. attorneys on what they should accept for settlement purposes. If they still fight you, these guidelines cannot be used to compel a judge to rule in your favor.
But What About Non-Federal Loans?
Unfortunately, all of that only applies to federal loans. With anything else, you are still left to prove this good faith effort.You can certainly mention all of the examples above (if they apply), but there is no guarantee that the lender's attorney is going to accept them.
The courts in general look at several things to determine this, including:
- situations where the debtor had made minimal (in one case, only $4,093.52 on an overall loan balance of $84,604.65), or no, payments; and
- whether the student loan was a significant portion of the overall debt in the bankruptcy.
Therefore, it is clear that if you are seeking to discharge a student loan in bankruptcy, you must do more than just show current, dire financial straits. You must seek to be employed to the maximum of your potential, and address payment in some significant way.
So What Do I Do?
Outstanding student loans continue to be a real problem for many New Jersey residents. If you live in southern New Jersey, are considering filing bankruptcy to discharge your student loans, believe you meet the standards for "undue hardship," and are ready to take action, then click here to schedule an initial, no obligation call with my office to discuss your case.
If you are looking for more information about bankruptcy, then download my free book,Top Questions People Ask About Filing Bankruptcy in New Jersey.
If you have federal student loans and would like more information about how to deal with them, you can dowload my free book, I Graduated; Now What? A Guide to Dealing with Your Student Loans.
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