Discharging Student Loans

Debtor’s rights are guaranteed under debtor laws to individuals who borrow money, who are known as debtors. These laws apply whether the debtor is purchasing a home, a vehicle, or is using the funds for personal use.

There are both federal and state laws which protect debtors from unfair treatment by creditors. This includes the Truth in Lending Act (“TILA”) and the Fair Credit Billing Act (“FCBA”). TILA is a federal law which applies to specific creditors and requires them to provide certain information to consumers. Examples include the amount being lent, as well as the applicable percentage rate.

The FCBA provides guidelines for the steps that a creditor must take when there is a dispute associated with a credit card bill. The FCBA also provides the consumer’s rights when there is an error associated with their credit card bill.

Some examples of measures that may be taken against debtors include:

1. Garnishments: A garnishment is a legal procedure which allows a creditor to collect the funds which a debtor owes. They do this by accessing the debtor’s property when that property is in the possession of a person or entity other than the debtor, such as in a bank account or in the account of an online investment company. A creditor may also be allowed to collect payments from a debtor’s wages or salary before the employer pays it to the debtor, which is known as a wage garnishment. However, it is important to note that there are certain types of property which cannot be garnished. Examples include:
   • A portion of the debtor’s work income, at a maximum of 25% of their weekly disposable income. Disposable income refers to income after taxes and other withholdings are deducted;
   • Veteran’s benefits;
   • Civil service benefits;
   • Federal retirement benefits;
   • Social Security benefits;
   • Supplemental Security Income (SSI) benefits;
   • Worker’s compensation;
   • Unemployment benefits, unless the garnishment is for the collection of child or spousal support; and
   • Child support paid to the custodial parent.
2. Levies And Attachments: A levy, which is also called an attachment, is the taking and selling of a debtor’s property in order to pay off the debt owed to a creditor. However, a creditor is only permitted to levy the property of a debtor when a judgment is issued against the debtor. The creditor must then obtain a writ of execution from the court, prior to requesting law enforcement to execute the levy or attachment and take possession of the property. A writ to execution is what identifies the property which can be taken and sold. Additionally, there is certain property which is exempt from a levy. An example of this would be how the law protects debtors from having all of their possessions or income taken away so that they can survive;
3. Collections: Collections refers to the process by which a creditor attempts to obtain a payment from a debtor who is not paying on what they owe. Collections can be performed by either a creditor, or by a collection agency; and/or
4. Repossessions: A repossession is the taking of property by a creditor, when that property was specifically used as security for the loan. Under most circumstances, loan documents will include a provision stating that if the loan payments are not made as required by the contract, the creditor has the right to repossess the collateral property.

What Happens If I Can’t Make Payments On My Student Loans?

There may be some options available to you if you cannot make payments on your student loans. You should be careful to avoid defaulting on the loans, which will significantly damage your credit and increase the amount that you owe. If you are having trouble making payments, potential options include:

• Loan cancellation;
• Postponing payments through forbearance or deferment; and/or
• Filing bankruptcy and discharging the loans.

A forbearance is a postponement of payments in which the loan holder (meaning, the bank or agency that granted you the original loan) allows you to stop making payments for a specific amount of time. Forbearances apply only to the principal sum owed; as such, interest will continue to accrue. Forbearances are easier to obtain than deferments but are less attractive because your total balance due will increase during a forbearance as a result of accruing interest.

Deferment refers to a postponement of loan payments that is based on a certain condition being met and for a certain amount of time. An example of this would be how you may be able to get a deferment for being unemployed, or for going back to school. The amount of extra time that a deferment gives you varies depending on the loan, and sometimes deferments postpone payments of both the principal due and the interest. However, it is never possible to receive a deferment if you have defaulted on your student loan.

How Do I Discharge A Loan Through Bankruptcy?

A law was passed in 1998 that has made it considerably more difficult to discharge a student loan when in bankruptcy. As a result, it is incredibly difficult to discharge a loan in this way, and the only approach is to convince the court that repaying the loan would create a severe hardship for you.

Severe hardship consists of the following core elements:

• Paying off the loans would result in failure to maintain a minimal and acceptable standard of living;
• Circumstances dictate that this low standard of living would persist for the foreseeable future; and
• You have made a good faith effort to repay the loans

While these elements seem easy to fulfill, the legal meanings of these ambiguous phrases prevent the vast majority of debtors from pursuing discharge through bankruptcy. A “minimal” standard of living means living below the poverty line in the state in which you reside; as such, the standards will slightly differ on a state-by-state basis.

The circumstances which force a debtor to live this way for the foreseeable future must also be outside the normal hardships that most people experience. An example of this would be how unemployment is not a circumstance that could fulfill this element. However, an inhibiting medical condition is one of the few examples which could be deemed an acceptable circumstance.

Finally, the debtor must be perceived as a responsible person who has encountered some bad luck and is being crushed by mounting debt. This last element is intended to prevent people from abusing the bankruptcy system in order to avoid payment of money that they legally owe to others.

How Do I Cancel Student Loans?

You may be able to cancel all or part of your loan by:

• Teaching disabled students and low-income populations;
• Joining the military or other uniformed service;
• Performing community service;
• Proving that the university you attended closed down;
• The university was falsely certified; and/or
• As a refund for a school that you applied for but never attended.

Cancellation of loans means that the loans are wiped clean, and any expected payments in the future are canceled. Additionally, prior payments are reimbursed. However, it is important to remember that loans are essentially a contract. As such, if a school is unable to fulfill its end of the contract, the school should not and would not be paid for services that were not rendered.

Do I Need A Lawyer For Help With Discharging Student Loans?

If you are considering filing for bankruptcy in an effort to discharge your student loans, you should speak with a financial attorney in order to discuss your options and rights. An experienced attorney will be able to advise you as to your legal options for discharging student loans.