Federal Student Loans: Income Driven Repayment Plan or an Adversary Proceeding in Bankruptcy.
With student loan payments restarting in October of 2023, many borrowers are taking a hard look at what options are available for repayment. Options on repayment are offered through a variety of Income Driven Repayment plans and in extreme cases, discharge of student loans through a bankruptcy proceeding. However, it is important to note that a discharge is difficult to obtain and is not easily available for private loans. Discussed below is the new SAVE Income Drive Repayment plan and a bankruptcy adversary proceeding. Please keep in mind that there are other repayment methods that may better suit your needs.
Income-Driven Repayment Plans
Income-Driven Repayment Plans or IDRs are repayment plans that calculate your monthly payment amount based on your income and family size.
Saving on a Valuable Education (SAVE) Plan
The SAVE has replaced the Revised Pay As You Earn (REPAYE) Plan and is offering the lowest monthly payment for most student borrowers; borrowers that are already enrolled in the REPAYE plan will automatically converted to the SAVE plan. This plan goes into full effect in July of 2024, but many features are available to borrowers now. Perhaps one of the most beneficial features is that borrowers will not see their balance grow as long as they are making the required payments. This means that if your payment is too small to cover the interest, the Department of Education will cover 100% of the unpaid interest, as long as you make the required payments. Additionally, more of a borrower’s income is protected for basic needs, using only 10% of discretionary income for payments, and if you just have undergraduate loans, then only 5% of your discretionary income is used. For those borrowers that are married and filing separately, you are no longer required to include your spouse’s income. To enroll into the SAVE plan, you can submit an IDR plan request at studentaid.gov.
Adversary Proceeding in Bankruptcy
Essentially, an adversary proceeding is a lawsuit within a bankruptcy proceeding. The adversary proceeding is started by you and/or your bankruptcy attorney by filing a complaint with the bankruptcy court.
Unlike other debts that may be automatically discharged due to the bankruptcy determination, student loans are not automatically discharged. In order to achieve a discharge, the borrower must show an “undue hardship.” To determine if a borrower has an “undue hardship,” New York State uses the “Brunner Test”; this test asks if the borrower is able to maintain a minimal standard of living while making the payments, is the financial situation likely to persist, and has there been a good faith effort to repay the loans. The Department of Justice has developed a new process for reviewing these adversary proceedings. These changes are meant to make the adversary proceeding simpler and more efficient for those who are filing for bankruptcy.
This is informational only and not intended to be legal advice. If you have any questions, please do not hesitate to call our office.
