Student Loans and Bankruptcy in Florida

Not all loans are alike.

A tuition bill is not a student loan. As a general rule, student loans are non-dischargeable debts, which means that you will still have to pay the loan off even after filing for Chapter 7 or Chapter 13 bankruptcy. Under current law, this is true for both federal and private loans, even if it’s a private loan from for-profit lenders such as Citibank or the student loan specialist Sallie Mae. Private student loans (also called the alternative student loans, e.g., FFELP and FDSLP) are generally given to supplement federal loans (Stafford loans, Perkins loans or the PLUS loans.)

If you default on your student loan, the U.S. Department of Education can have money deducted from your federal income tax refund to collect on defaulted federal student loans (tax offset) or force your employer to withhold a portion of your pay (wage garnishment) or both.

Ordinary tuition bills have different considerations. Generally, so long as the family did not sign a promissory note (which would cause them to be considered educational loans), unpaid tuition bills and other college bills can be discharged in bankruptcy. A Florida Bankruptcy attorney should review of all documents signed in connection with the unpaid tuition bills to determine whether they are dischargeable in bankruptcy.

There are remedies.

Under the present law, the only way to have your student loan discharged is to prove to the bankruptcy court that repayment would impose undue hardship on you and your dependents. This will require the filing of a petition (called an adversary proceeding) to convince the judge that you meet the test for proving undue hardship. Your creditors will be present to challenge the request. Co-signers on a student loan must also prove undue hardship in order to discharge student loans in bankruptcy. A competent Florida bankruptcy lawyer should be consulted to represent you in these proceedings.

The courts in Florida use a three-pronged test to determine hardship:

• If you are forced to repay the loan, you would not be able to maintain, based on current income and expenses, a “minimal” standard of living for yourself and your dependents; and the debtor’s dependents if forced to repay the student loans
• There are additional circumstances that show that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans.
• You made good-faith efforts to repay the loan before filing bankruptcy (usually this means you have been in repayment for a minimum of five years).

The Courts will also consider whether you have the ability to maintain a minimal standard of living during repayment as well as current and future employment and other factors that may affect income, such as education, health and dependents. It compares your income with the federal poverty line.

This is a very difficult burden, in part because Congress never defined what it meant by an undue hardship. Nevertheless, if you satisfy these tests, your student loan will be discharged.

There are, however, other options, including repayment. The U.S. Department of Education Direct Loan Servicing Center offers low cost monthly income-dependent repayment and rehabilitation plans, as well as possible consolidation of qualifying student loans.

You may be able to suspend or defer payments for a period of time if you are dealing with a specific hardship, such as unemployment, disability or military service.

After graduation or if you become a part-time student, you may be eligible to consolidate your outstanding loans and negotiate a new and more affordable repayment plan.

If you received a National Defense Student Loan you may be eligible to receive partial cancellation of your loan if your military service was for a full year in a hostile area.

If you received a Federal Perkins Loan Direct Loan or FFEL Program Loan, you may qualify for a Closed School discharge if you could not complete the program of study because the school closed.

The Teacher Loan Forgiveness Program grants loan forgiveness of up to $17,500 for teachers in certain specialties and up to $5,000 for other teachers who teach for five years in certain low-income schools and meet other requirements.

When bankruptcy is filed, an educational institution is not permitted to withhold transcripts because of the automatic stay provision of the bankruptcy code. Additionally, it may not refuse to provide an official academic transcript after the debt is discharged.

A Chapter 13 proceeding is a reorganization of debt in bankruptcy.  In a Chapter 13 proceeding, you will prepare a plan that will decrease the amount of debt and allow for debt payment at levels you can afford by extending the debt over a period of three to five years. Nevertheless, because student loans are non-dischargeable except as discussed above, you will still owe whatever student loan debt remains after completion of the plan; interest will continue to accrue on your student loan during the term of the plan.

Student loans involve complicated issues, which require the expertise of experienced Florida Bankruptcy lawyers.