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More Student Loans Getting Discharged Due To Neglectful Lenders

Student Loans Dischargable In BankruptcyLet’s face it, when student loans were made nearly impossible to discharge in bankruptcy, lenders realized they could hand over as much money as they wanted to to kids with no risk. Schools could then charge whatever exorbitant fees they could convince students to sign up for and could give them an altogether useless degree in underwater basket weaving. Since parents have ritualistically repeat the mantra, “Go to college.” since the child was a mere babe, it’s easy to see why our young graduates owe more than $1 trillion dollars in total.
Rule 11 U.S.C. 523 (8) governs the discharging of student loans in bankruptcy cases. In summary, it requires that an undue hardship to the debtor or their dependent would occur were the loan(s) not discharged.
Judges have had fun in deciding what an “undue hardship” is, but have basically boiled it down to the following: An undue hardship occurs if a debtor can show that they (1) cannot maintain, based on current income and expenses, a “minimal” standard of living for themselves and their dependents if forced to repay the loans, (2) additional circumstances exist indicating that the debtor’s financial situation is likely to persist for a significant portion of the repayment period for the student loans, and (3) they have made good faith efforts to repay the loans. As each of these three prongs must be proven to discharge the debt, this is a hefty standard. This has been made especially difficult since the passage of the 2007 “College Cost Reduction Access Act“, which created the Income Based Repayment plan. Income Based Repayment reduces Federal Student Loan payments to 15% of the difference between the debtor’s gross income and 150% of the poverty line. Without forcing you to do complicated mathematics, I will say that it makes student loan payments very manageable. As a result, hardships are impossible to prove if the loans can qualify for the Income Based Repayment option. Income Based Repayment allows you to pay a fraction of your income for ten to twenty-five years depending on the type of employment you have. At the end of the repayment period, the U.S. Government discharges your remaining debt, i.e. pays your loan.
So, we’ve gone from a system where we used to force private lenders to be responsible with their lending practices by allowing debtors to discharge irresponsibly large loans in bankruptcy, to a system where we allow private lenders to lend as much as they’d like to new students and have our government pay those loans off after a period of time and a repayment of a fraction of the debt.
Regardless of the arguments against the policies of this system, it is still possible to discharge student loan debt even if the loans qualify for Income Based Repayment and that is by a simple procedure known affectionately in the legal world as a “default judgment”.
A default judgment can occur in nearly every kind of case. It occurs when a petition, complaint or motion is filed and served upon a respondent. Service in Florida generally requires a twenty day period to respond to what was served. If no response is filed with the court or the petitioner, a default can be entered by the clerk of the court and then by the judge. It works like this: I say that a loan can be discharged in a bankruptcy for reason X. Regardless of the merits of reason X, if the respondent fails to answer in sufficient time, the court has to rule in my favor. This happens in divorces very frequently. If the wife says the husband should surrender his interest in all personal property and he’s properly served with the document and fails to respond, he’s just surrendered his interest in all personal property. Failure to object to these terms is considered an agreement with them.
Default judgments can be attempted against student loan companies by serving their corporate headquarters and waiting for a response. The recent case of In Re Gourlay, this very fact pattern emerged and Miss. Gourlay was successful. Still, discharging student loans is risky business, but not a business that should be overlooked 100% of the time. If you have the need to file bankruptcy anyway and it looks like a hardship could be argued, talk to your attorney about the possibility of discharging your student loans or contact a Jacksonville Bankruptcy Attorney or call us at (904) 685-1200 for a free consultation.

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