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Be Careful of Student Loan Debt Forgiveness Scams

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If you, a loved one, or a friend want help paying down student loan debt, there are legitimate ways to do it quickly.

There is a recent bankruptcy case (Rosenberg) that made national news when it comes to discharging Student Loan Debt (SLD). This case has already emboldened scammers touting that they can help students eliminate their debt through bankruptcy for a “fee.”

Discharging Student Loan Debt (SLD) in bankruptcy

While MOST debts can be discharged in bankruptcy, SLD is NOT one of them. In order to have SLD discharged in a bankruptcy case, borrowers, in most cases, need to satisfy the “Brunner test” which has three prongs that all must be met.

  1. The borrower cannot maintain, based on current income and expenses, a “minimum” standard of living for him/herself and his/her dependents if forced to repay the loans;
  2. That additional circumstances exist indicating this state of affairs is likely to persist for a significant portion of the repayment period; and
  3. That the borrower has made good faith efforts to repay the loans.

Much of the debate includes what borrowers can spend money on while still claiming they don’t meet the minimum standard of living. Some courts have held borrowers fail this prong of the test if they buy cigarettes, give to their local church, contribute to a retirement plan, go out to eat instead of saving money by cooking at home, and the list goes on.

There is also much debate on good faith efforts to pay back the loans. Did the borrower make any payments and if so for how long? Did the borrower try to refinance and extend the time frames to pay back the loan? Did the borrower make a good faith effort to work and was that work in the field for which the loans were taken out?

The bottom line for this newsletter is the conclusion that it is VERY difficult to get student loan debt discharged in bankruptcy.

Rosenberg vs. NY State Higher Education Services Corp

A U.S. Navy veteran had his $221,385 SLD discharged in a Chapter 7 bankruptcy case. If you read the hundreds of articles written on this case you’d think that the door is now wide open for borrowers to get their debts discharged in bankruptcy. That is NOT the case.

What was unique about Rosenberg?

  1. The “local” bankruptcy judge did NOT seem to follow historical precedent on these types of cases (she seemed to bend over backwards to get the outcome she wanted (almost like it was a political statement vs. a rational judgment)).
  2. The borrower made SLD payments for 13 years and only missed 16 payments.
  3. The borrower had a negative monthly income of $1,548.
  4. The loan was in default (meaning the entire balance was due vs. the payment plan he was on).

Thoughts on why Rosenberg won

It seems the judge was looking for an excuse to find for Rosenberg. When you read the opinion, you can sense her disdain for the law she was supposed to enforce. Because Rosenberg had made payments for years and because the loan became due and payable in full, that seemed to be her excuse to say Rosenberg fulfilled the Bruner test.

On Appeal – this case has been appealed by the lender. It will be very interesting to see if it gets overturned on appeal.

Final thoughts

This case doesn’t appear to change the landscape of student loan bankruptcy. Stay away from firms touting that for a small fee ($300-$1,000) they will help clients attempt to get their SLD discharged in bankruptcy. It is not an easy process and most people will fail (95%+).

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