Disclaimer: Morgan Fisher is not an attorney and what follows is his opinion only, not legal advice.
Robert F. Writes SDWP:
I owe student loans in excess of 80-k. I will never be able to pay this back, I am 64 years old, disabled and living on SSI. My income barely covers my basic needs. I have tried to get a permanent deferment, but have not been successful. I get a different story every time…
Morgan Fisher, Co-Founder of Student Debt War Responds:
Until citizens start earnestly interacting with the federal government and those who hold their student loans, they do not appreciate or understand how corrupt the system actually is—-the Department of Education is set-up to benefit banks and lenders and colleges and universities, not students.
Robert’s story is not unique. He is disabled and receiving SSI. Soc-Sec says he can survive on $540 per month (national average) so he is forced to live about 50% below the poverty line—this is because the United States of America believes disabled people ought to be abused and mistreated. We’ve see this pattern of government-borne abuse over and over (i.e. Vets at VA dying for lack of timely care, student debtors forced into permanent, lifetime slavery through college debts, and the list goes on). In spite of propaganda otherwise, government is not your friend—-learn that first and the rest becomes easier because now you know what you’re dealing with.
Robert has two ways he can discharge his student loans completely because he is 100% permanently disabled: 1) Administratively, 2) Bankruptcy and an Adversary Proceeding.
Normally, I used to suggest most people follow the administrative discharge choice. However, we have seen a major upsurge in unlawful activity around this process coming from student loan holders and the Department of Education and its designates. Debtors are doing their part, but the powers that be are lying and deceiving them and breaking all sorts of laws in the process—they prey on student debtors because they know nobody is going to help them stand up for their legal rights—the law is optional for them so they choose to avoid voluntary compliance (they rarely incur consequences for bad faith actions). Also, Administrative Discharge can and does take 3 or more years (if all goes well) and has a few landmines of its own. Hence I now recommend the faster and more forceful Bankruptcy Discharge option for student loans (with respect to the disabled—undue hardship cases as well).
Bankruptcy Discharge of Student Loans
The law allows those without significant assets and unpayable debts like student loans to file for what is known as Chapter 7 Bankruptcy and discharge student loans. For those who are not disabled but otherwise qualify for bankruptcy and some or all of student loan discharge, Chapter 13 is often the better option for discharging student loans. Each type Chp 7/13 has its own set of tactics, which are too detailed and extensive to list here.Consult an attorney to learn more.
Assuming Robert has not filed for bankruptcy within the last 8 years, he appears otherwise qualified for Chapter 7 and full discharge of his student loans. Most local counties waive all court filing fees so I would file Chp 7, if Robert.
Now under federal law, the Bankrupt has 60-days to file a lawsuit inside the bankruptcy known as an “adversary proceeding” (just another fancy word for lawsuit). For someone who is already declared legally disabled, the adversary proceeding (AP) process is very easy (not so easy for the ‘undue hardship’ case).
The AP paperwork states a Cause of Action. It generally says Plaintiff (the bankrupt person) is discharging their student loan on the grounds of undue hardship due to permanent disability. The specific law cited is “11 Title 523(a)(8)“.
Again, the reason for the undue hardship is “100% disability”. The courts are required by law to discharge student loans for the permanently disabled to ensure consistency with other federal laws already in place that do the same.
In the AP, the Plaintiff attaches the evidence supporting disability as Exhibit A, which is a cover page entitled “Exhibit A” and copies of the key Soc-Sec documents that prove disability. Government generated documents (copies) are required (as a rule).
One such Soc-Sec document is the bankrupt’s/ Plaintiff’s “Notice of Disability Determination” that they got from Social Security. However, the Plaintiff can use other evidence to establish the same fact (i.e. SSI payment notices from Soc-Sec, etc.). The Plaintiff without such documents can go online or write Soc-Sec and get a copy of whatever is needed for the “Exhibit A”.
The AP is filed with the same Bankruptcy Court and formally served copies go out to any and all known lenders or note holders of the past, present (and future—lenders are notorious for moving loans around to try and fool the Plaintiff and courts but do not worry (the burden of proof at that point falls to the lender/note holder). There are legal service requirements to adhere to and copies of everything must be kept by the Plaintiff. According to federal case laws, even if the Plaintiff just names the original and current note holder and the loans are discharged by the court, any note holder later on is out of luck—the loans are discharged anyway.
When the AP court date comes, the Plaintiff arrives in court with their paperwork originals and copies of those originals to give to all who attend, including the judge. The copies may not be needed but they should be available.
In 95% of such cases, before the trial, the lender / note holder will contact the Plaintiff and ask for copies of certain disability paperwork (informally), if they are needed for clarity because “Exhibit A” is unclear. At this point, the note holder is merely trying to ascertain if the Plaintiff is, in fact, already legally declared disabled by Soc-Sec. The Plaintiff should help them do it (within reason).
Once the Note Holder is satisfied the Debtor/Plaintiff is disabled, the Note Holder may issue a motion or notice to the Court essentially saying they agree to the discharge (i.e. they do not contest it). Or, they may not even appear in court or all, in which case the Plaintiff has won, except for the technical paperwork aspects, etc..
For example, if the Note Holder says “no contest” or does not appear in court, the Plaintiff would then file a motion for summary judgement based on the pleadings and evidence and the court would normally grant it at the hearing or a follow-up hearing.The court has an independent duty to review the evidence and ensure you qualify for discharge but this is generally done before the hearing—if the court has questions, it may ask for more documents then grant the motion once satisfied.
Some judges speed things up and help Plaintiffs and some cause trouble and roadblocks, demanding every T crossed—but eventually the student loans end up being discharged inside the AP, which is inside the Bankruptcy. Trial is typically not necessary.
Bankruptcy Discharge of Student Loans Saves Money
The great benefit of discharging a student loan inside a bankruptcy is that the discharge is TAX FREE. Some years back, Congress sought to punish citizens by making them pay taxes on bad loans that were “written off” by the lender (the money is considered “income” at the time of write off, hence is taxed as income). In Bankruptcy discharge, there is no income status on the debt discharged so the IRS gets nothing. In most cases, a bankruptcy discharge is preferred over an Administrative Discharge because of the tax aspect alone.
For example, a student who Administratively Discharges $100,000 in student loans could owe the IRS $30,000+ in taxes—and now the IRS is there lifetime buddy. There are provisions in the tax code that can resolve this problem (or there where) but the student debtor must check with the IRS or tax professional to see all the facts and details that apply to their case and how to proceed (it’s beyond the scope here).
Representing Yourself In Bankruptcy (Pro Se)
Robert can go online, get most of the forms and find enough hints and tips on how to prepare his bankruptcy and AP paperwork. In many cities, Attorney’s Offices run Paralegal For Hire Services (supervised by an attorney) who can fill out the right forms and show you what to do for a small fee (including your AP paperwork). For less than $500 using such a service, or doing it all by yourself, the disabled student debtor can become permanently free of all student loan debts for the rest of their life.
Of course, the Cadillac method is to hire an attorney so consult one or many before you leap. The disabled can generally get by without one. Undue hardships are much more complicated cases. Expect about $10k to $40k to hire an attorney, which is why I recommend the legal aid and/or paralegal aid approach, when possible (about $500 total max—far more affordable).
WORD OF CAUTION: most bankruptcy attorneys do not take “undue hardship” cases and of those who might do them, many have no experience. Be careful and screen well.
- I would not make any student loan payments if I were considered by Social Security to be 100% permanently disabled. Just file for discharge either Administratively or through Bankruptcy.
- Some student loan payments made after one is legally declared disabled may be refundable.
- Keep a record/copy of everything in a large plastic storage box–everything goes into the box!
- Don’t rush it. Take your time and make sure you have everything lined up and done right then file your paperwork for discharge accordingly.
- The most important documents are those from Social Security indicating you are disabled.
- Never give anyone an original document—nobody, no agency, no exceptions! Social Security often asks for originals but has a reputation for not returning them so trust nobody–especially government! Go there, let them copy in front of you—leave with your originals.
- If you can afford it and need to, hire an attorney for a consultation and use the time to make a detailed checklist of what she tells you to do (this is the best way to proceed but sadly, most student debtors who are disabled do not have access funds or this option. And most cities around the country do not treat student debtors well when it comes to free legal aid services but don’t let that stop you from trying to get in and see an attorney).
- Make sure you list each and every student loan you ever had in your life in your paperwork properly (all debts for that matter).
- Go to the law library and study the federal rules of procedure and get familiar with what to expect. Law Librarians can guide you to good materials but they will not give you advice. Some law libraries offer Pro Se training—take it.
- Have no fear. The judge sees dozens of people like you every week so you bore her—you’re just another number to them so don’t worry. And the big bad lawyers are not going to bother with you either because they know they cannot stop a discharge of someone who is disabled—-it’s a waste of their time and money. Just make sure you can prove you’re disabled and stick with it.
- If you get lost, or make a mistake, ask the judge for a personal opinion like this. “Your Honor, I keep making mistakes with xyz, in your personal opinion, if you were me, what would you do differently? Or, Is there something I can do differently to hurry this out of the court and quit wasting everyone’s valuable time, especially this court’s your Honor?
- And never try to suck up to the judge—they see it coming a mile off and it works opposite.
- When you are all done, come back to SDWP and share your experiences and wisdom with others like yourself—give back. I helped you, now you help someone else twice over and we’ll call it even—how is that for win/win? Good luck!
Q: I thought student loans could not be discharged in bankruptcy?
A: Bankruptcy allows student loan discharges for disabled and those who suffer “undue hardship”. Banks, lenders, universities, and others who profit off student loans generally perpetuate the myth that such loans are not dischargeable in order to dissuade student debtors from making the attempt—they lose money!
Q: Do I have to be disabled to discharge student loans in Chp 7?
A: No. Disability is not required to prove “undue hardship”. The disabled are automatically qualified by various federal laws.
Q: What about my destroyed credit history? Does bankruptcy help that?
A: No. Solving credit history problems is another issue on its own.