Anyone wondering how to get out of student loan debt - or wondering if a slew of student debtors could try to do so - needs to read this.
Yesterday, I wrote about the case of Michael Hedlund, the failed law student who was able to discharge $58,000 of his student loans in a 10-year bankruptcy action.
Before Hedlund's case, it was widely accepted that there were only two ways to get out of student debt: pay it off, or die.
But the Ninth Circuit took a long, hard look at Hedlund's circumstances. It found that he'd acted in good faith to repay his loans, and that paying the full amount would be an undue hardship for Hedlund and his family.
The court viewed Hedlund as an "ideal debtor," and so it excused a large portion of his debt.
If you are a student debtor, you too could have a decent shot at discharging your student debt in bankruptcy, but only if you are an ideal student debtor.
But what makes an ideal debtor?
How to Get Out of Student Loan Debt
Here are the seven things that convinced the Ninth Circuit Hedlund is an ideal debtor:
#1: Make every effort to obtain employment
Hedlund was good about always having a job. After getting fired from the local District Attorney's office for failing the bar exam a third time, Hedlund immediately found work as a Juvenile Counselor in his county.
#2: Maximize your income
You must make as much money as you can with the skills you possess.
The bankruptcy court determined that Hedlund was "well-placed for his skills." It noted he'd applied to higher-paying jobs, but to no avail. Hedlund had sufficiently maximized his income as best he could.
#3: Minimize your expenses
Are you thrifty?
The court looks at everything - clothing, recreation (including internet and cable), childcare, personal care, cell phone use - I mean everything, to decide if you are living frugally.
Too many haircuts in a month can make or break you here.
#4: Try to negotiate a repayment plan
There is an expectation that you must attempt to work with the lender to negotiate a payment plan you can manage.
In Hedlund's case, he offered the lender payment plans he could afford, but was rejected. The lender counteroffered options totally out of Hedlund's reach.
#5: Make payments whenever possible
Some months may go better than others, and you must pay when you can.
Hedlund got a $5,000 inheritance, and made a $950 payment to his lender. He used the rest to pay off other debts. He also endured wage garnishments for as long as he could without contest.
#6: Try to restructure the loan
A debtor must utilize all the resources available to him or her. For instance, consolidate the loans to lessen the monthly payment, apply for the ICRP (Income Contingent Repayment Plan), etc.
#7: Suffer from undue hardship
The court has to be convinced that you can't maintain a minimal standard of living if required to pay the loan. It must determine that this state of affairs is likely to persist for most of the loan's repayment period.
Finally, the above criteria (numbers 1 through 6) must be true to show you have made honest good faith efforts to repay the loan.
For Hedlund's full story, check out Law Student Exposes the Secret to Wiping Out Student Loan Debt in Bankruptcy
- Money Morning:
The Scary Reality of the Student Loan Bubble in 5 Charts
- Money Morning:
How Student Loans Became a $120 Billion Government Bonanza
- United States Courts for the Ninth Circuit:
Michael Eric Hedlund v. The Educational Resources Institute Inc.; and Pennsylvania Higher Education Assistance Agency, 2013 WL 2232325 (C.A.9 (Or.)), 13 Cal. Daily Op. Serv. 5096