National Collegiate Trust / ALPN student loan in Chapter 7 BK

[Texas2Step]

I became unemployed 3 years ago after nearly 30 years of stellar work after an acute mental health event and was subsequently fired from my job (first time fired and I didn't freak out at work).....I've since been helped by medication but have been unable to find employment in my previous field (60k per year). It is all I've done for nearly 30 years.

 

We relocated to Austin Texas 2 years ago.

 

We have drained our retirement accounts.

 

My wife has been unable to find work in her field (3.0 student / top 10 undergrad business program) as an older student (mid 40s) with bad credit and has instead been employed to do data entry.

 

As a result, my wife's student loans (around $45K ) went into default and she is considering filing Chapter 7 BK for another non-education related bill for which a garnishment will likely be sought. Unfortunately, her employer is from out of state and the JDB attorney had the judgement domesticated to her employer's state. As a family of 4 we are unable to get by on $30k per year with pending garnishments.

 

Some of the student loans were originated in the 1990s and then again in 2007

 

Sallie Mae student loans were returned to the Department of Education for collection and a few others were apparently (ALPN) private alternative student loans which National Collegiate Trust has sold.

 

West Asset Management is already receiving a garnishment for a student loan but has filed another request for garnishment on the same student loan account (I didn't know that was even possible).

 

I just spoke with National Collegiate Trust and they indicate a $9,183 was defaulted 3 years ago and subsequently sold to NCO Financial (CA). NCO Financial has filed paperwork to get a garnishment.

 

Garnishment paperwork is starting to come in from 4-5 companies associated with the student loans..... We just can't get by, I sell plasma and my wife stops by food banks. Amazing how far one can fall. I don't even recognize myself anymore. We both joined the Army to get an education so we could pull ourselves out of poverty and nearly 30 years later we're worse off than when we were children. We've pulled our 2 children down during the fall.....very bright....both in gifted and talented programs, eldest in Duke TIP, straight A's, top ten student .....but here we are...drowning.

 

 

I've read conflicting information regarding the ability of debtors to discharge private student loans and have not been able to determine a definitive answer as a result.

 

1. Are private student loans dischargeable within the normal course of a chapter 7 bankruptcy in Texas

2. Are there statute of limitations associated with private student loans?

3. Are there different enforcement rules based on the governing statutes at the time of the loan origination?

 

Any assistance on this would be greatly appreciated. As with everyone else, this is a particularly difficult period of time and apologize for the lack of brevity. It is easy to feel despondent.

 

 

 

Two observations: 1) The ALPN (private) loans carried variable interest rates which reflect the discounted "value of money" .In essence, debtors pay a risk premium for interest rate and repayment uncertainty. How then can creditors have it both ways? 1. TGenerate higher ROI by charging a variable rate (present value of money / pricing risk) and retroactively imposing no default risk when that was already implicitly accounted for in the initial contract.

 

2) How can a contract be enforceable if one of the parties is retroactively disadvantaged by a change in the terms ex post facto? Admittedly sour grapes but if 2 parties enter into a contract based on specified terms, their evaluation of risk and benefit, how can one party retroactively have their position enhanced years later for the duration of the contract?

 

As I indicated above, the creditor has assumed the risk and has been compensated via a variable risk premium based on the terms at the time the contract was executed. If the terms of enforcement of the contract changed, then why didn't the interest rate drop to reflect the reduction of repayment risk?

 

 

 

Thanks again. Very much appreciate the community as a silent lurker.....

 

 

 

 

[hodap2001]

It's pretty well known by now that student loans cannot be discharged through the normal bankruptcy process. Instead, Congress requires student loan borrowers to initiate an adversary proceeding, a separate lawsuit filed within the bankruptcy case, in which they have to prove that repaying their student loan debt would be an "undue hardship." In the absence of any further guidance from Congress on what constitutes an undue hardship, most courts now apply what is called the "Brunner standard." That standard requires a borrower to prove three things: One, that the borrower and any dependents cannot maintain a minimal standard of living based on current income and expenses; two, that additional circumstances indicate this is likely to be the case for a significant portion of the borrower's repayment period; and three, that the borrower made a good faith effort to repay the loans. The conventional wisdom is that the need for a separate proceeding – for which many bankrupt borrowers will be unable to afford a lawyer – and the stringency with which courts apply this standard make it virtually impossible for borrowers to discharge their student loans.

 

With that out of the way, the clear answer is NO, Private Student Loans and Federally Backed Student Loan cannot be discharged in Bankruptcy unless you have the time,money, energy, and an energetic lawyer who will file an adversary proceeding that will take a long time to proceed through the court system. The statute of limitation for PSL is the state state's (Texas) statute of limitation and Federally Backed Student Loans have NO statute of limitation and the Federal Government can and will recoup their funds through any mean necessary including Administrative Wage Garnishment, Tax Offset, Judgement, Bank Levy, and the most severe Social Security Offset.

For Private Student Loans just because the statute of limitations passes does not mean that a creditor or collection agent cannot try to collect on the debt. If you make a payment on a debt whose statute of limitations has passed, you can bring an expired debt back to life. The statute of limitations for a written contract no longer apply if the creditor or collection agency sues you, before the statute of limitations expires, and obtains a judgment against you. If that happens, you will be subject to wage garnishments, bank levies, and liens (and this already sounds like it has happened to you and you're trying to vacate a judgement through Bankruptcy) that has already been issued against you because Wage Garnishment Orders are now coming in.

In reference to the interest rate, you signed a contractual agreement agreeing to the terms and conditions of the loans and the consequences of non-default; therefore, the interest rate issue is MUTE because you were fully disclosed at the time of the loan(s) being originated so your thought process is non-argue-mental.

I am truly sorry that you are in this position, but you need to speak to an attorney and determine if you meet the definition outlined in the Brunner Standard.

I hope this guidance is helpful!!!

Edited August 7, 2013 by hodap2001

[Texas2Step]

Very helpful Hopdap. Thank you very much for your thoughtful and reasoned response. It does seem odd, however, that a private student loan cannot be discharged via a chapter 7 bankruptcy but apparently is subject to Texas SOL (4 years).

 

I've cut and pasted an abstract of an interesting paper and included a link to where the paper can be downloaded. The title is self explanatory but it suggests that there may be more hope to have student loans discharged than previously thought based upon the "Brunner standard" you previously mentioned. Something like only .10 of debtors attempt to discharge their student loans but of those that do try, around 4 out of 10 are successful (accounting for selection bias etc...). Moreover, attorney vs self representation does not indicate a statistically significant bias in favor of having counsel. Those who are successful tend to fit within a fairly narrow classification, as you alluded to. However, at first blush it would appear to me that we may fit within those general guidelines.

 

An Empirical Assessment of Student Loan Discharges and the Bankruptcy Undue Hardship Standard

Jason Iuliano, Harvard Law School and Princeton University

 

Abstract

 

For years, academics have asserted that the undue hardship standard
for discharging student loans in bankruptcy is both unduly burdensome
and applied in an inconsistent manner. By reviewing a nationwide sample
of more than two hundred student loan bankruptcy disputes, this study
shows that neither criticism is warranted. First, judges granted
hardship discharges to nearly forty percent of the debtors who sought
them. Second, successful debtors differed from their unsuccessful
counterparts in three important respects. They were (1) less likely to
be employed, (2) more likely to have a medical hardship, and (3) more
likely to have lower annual incomes the year before they filed for
bankruptcy. The real problem with undue hardship is not its harsh
requirements or inconsistent application; rather, it is that more people
do not seek to discharge their student loan debt. Incredibly, only 0.1
percent of student loan debtors in bankruptcy attempt to discharge
their student loans. This statistic is even more surprising in light of
the fact that a debtor does not need to hire an attorney to be
successful. In fact, debtors without an attorney were more likely to
discharge their student loans than debtors with an attorney.
Ultimately, the low rate of filing shows that, although the system is
broken, its flaws stem from a failing not previously discussed in the
literature. Simply put, the student loan problem would be much less
severe if more bankrupt debtors actually tried to discharge their
student loans.

 

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1894445

[hodap2001]

I don't think you qualify as you have loans from the 90's and those should have been paid off under a standard 10 year and now it's almost 23 years later give or take a few years and those haven't been paid off according to you - so did you truly make a good faith effort in repaying that debt? It's a broad definition? Furthermore, you had 30 years in a successful career and you were laid off, how can you guarantee that you will never ever get that same position in 5 or 10 years down the road? You need to think logically and long term and not short-term and state "oh yeah I fit in that group" right now. But will you fit in that same group in 5 or 10 years down the road? What about your significant other - there future income will be a factor; therefore, you really need to talk to a lawyer about this.

 

Don't get me going on those plausible discharges because those cases have been in litigation for years and years....do you want to subject your family to that and continue to live in poverty until the case is resolved and show proof to the court that your still in poverty year after year? I don't think so...we are humans and we always want more $$$.

 

I can go on and on about this discussion but I think you understand where I'm coming from and how it relates to you student loan issues.

[LynnInMN]

If it helps, Texas is a non garnishment state. Your wages cannot be garnished for a judgment.

[Texas2Step]

CB student Loan Guru:

They can garnish for federal student loans.....but not private student loans past 4 years?

[evapor8ted]

They would have to get a judgement to garnish wages for a private SL, just like any other consumer debt. SOL would be a defense in court to prevent the judgement.

[hodap2001]

I think the OP already has a Judgement in place which is why the OP wants to file bankruptcy to put a stay on the judgement and future execution of a wage garnishment order.

[LynnInMN]

How are they able to domesticate the judgment to a state the OP does not reside in....to her employers state?? That does not seem legit. They should be able to dispute the garnishment.

[evapor8ted]

If garnishment on a judgement is forthcoming, may be better to post in HIBS. The judgement would have to be domesticated to the jurisdiction the debtor resides in, the POE home office has nothing to do with jack.

[chrisrobinson]

 

It's pretty well known by now that student loans cannot be discharged through the normal bankruptcy process. Instead, Congress requires student loan borrowers to initiate an adversary proceeding, a separate lawsuit filed within the bankruptcy case, in which they have to prove that repaying their student loan debt would be an "undue hardship." In the absence of any further guidance from Congress on what constitutes an undue hardship, most courts now apply what is called the "Brunner standard." That standard requires a borrower to prove three things: One, that the borrower and any dependents cannot maintain a minimal standard of living based on current income and expenses; two, that additional circumstances indicate this is likely to be the case for a significant portion of the borrower's repayment period; and three, that the borrower made a good faith effort to repay the loans. The conventional wisdom is that the need for a separate proceeding – for which many bankrupt borrowers will be unable to afford a lawyer – and the stringency with which courts apply this standard make it virtually impossible for borrowers to discharge their student loans.

 

With that out of the way, the clear answer is NO, Private Student Loans and Federally Backed Student Loan cannot be discharged in Bankruptcy unless you have the time,money, energy, and an energetic lawyer who will file an adversary proceeding that will take a long time to proceed through the court system. The statute of limitation for PSL is the state state's (Texas) statute of limitation and Federally Backed Student Loans have NO statute of limitation and the Federal Government can and will recoup their funds through any mean necessary including Administrative Wage Garnishment, Tax Offset, Judgement, Bank Levy, and the most severe Social Security Offset.

For Private Student Loans just because the statute of limitations passes does not mean that a creditor or collection agent cannot try to collect on the debt. If you make a payment on a debt whose statute of limitations has passed, you can bring an expired debt back to life. The statute of limitations for a written contract no longer apply if the creditor or collection agency sues you, before the statute of limitations expires, and obtains a judgment against you. If that happens, you will be subject to wage garnishments, bank levies, and liens (and this already sounds like it has happened to you and you're trying to vacate a judgement through Bankruptcy) that has already been issued against you because Wage Garnishment Orders are now coming in.

In reference to the interest rate, you signed a contractual agreement agreeing to the terms and conditions of the loans and the consequences of non-default; therefore, the interest rate issue is MUTE because you were fully disclosed at the time of the loan(s) being originated so your thought process is non-argue-mental.

I am truly sorry that you are in this position, but you need to speak to an attorney and determine if you meet the definition outlined in the Brunner Standard.

I hope this guidance is helpful!!!

 

Unfortunately, this is all correct. The only thing I might add is that there are rare cases where a discharge by declaration has been effected by an improper Chapter 13 bankruptcy plan that was confirmed in error. This is very rare, and I wouldn't hold my breath on it working out. It would require that the judge, standing chapter 13 trustee, and the student loan lender not to really pay attention. For an illustrative case, see United Student Aid Funds, Inc. v. Espinosa.

 

On another note, I hope the original poster used the money from the retirement accounts to pay down the student loans and not dischargeable unsecured debt. This is generally a bad strategy, and it may also increase your tax liability as an FYI. I'm not trying to be a jerk to the original poster, but he should have consulted with an attorney and asked for advice much sooner. I include this as a warning to others.

Edited November 29, 2013 by chrisrobinson

[chrisrobinson]

 

Two observations: 1) The ALPN (private) loans carried variable interest rates which reflect the discounted "value of money" .In essence, debtors pay a risk premium for interest rate and repayment uncertainty. How then can creditors have it both ways? 1. TGenerate higher ROI by charging a variable rate (present value of money / pricing risk) and retroactively imposing no default risk when that was already implicitly accounted for in the initial contract.

 

2) How can a contract be enforceable if one of the parties is retroactively disadvantaged by a change in the terms ex post facto? Admittedly sour grapes but if 2 parties enter into a contract based on specified terms, their evaluation of risk and benefit, how can one party retroactively have their position enhanced years later for the duration of the contract?

 

If there were terms in the promissory note providing for the variable rate, then there wash't really a change in terms. Rather contingencies addressed in the original agreement came true to your detriment. That's not the same thing, and the latter really isn't the private loan lender's problem. You cannot avoid a contract that you agreed to that is otherwise perfectly legal because things don't work out the way you planned. The agreement seems perfectly enforceable.