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Many Americans turn to bankruptcy when their debt becomes overwhelming and unmanageable. But there is one form of debt that most people think is almost impossible to settle through bankruptcy: student loans.
Melissa Loe, a 47-year-old woman who lives in Los Angeles, knew it, but decided that hard didn’t mean impossible. She managed to successfully settle over a quarter of a million dollars – $ 349,800 – in federal student loan debt with the Department of Education while filing for bankruptcy.
But does Loe’s story represent hope for the millions of Americans who are tied up with thousands of dollars in student debt? Or is it just an outlier?
Take out student loans for a better future
Loe’s story is similar to that of many Americans: she took out federal student loans in the hopes of gaining the knowledge and resources to build a successful career. But as a person living with type 1 diabetes and multiple complications, his medical bills have skyrocketed and his student loans have become a relentless force preventing him from achieving financial and general well-being.
“If you’re me and you have to buy insulin, you have to pay rent and a student loan, but you only have money to pay for two – what do you do? Said Loé.
Loe attended school for years due to her illness, first taking out federal student loans in 1997 to complete her undergraduate degree. Her student loans first became due in 2005, but she was unable to pay them due to increased medical bills, according to her bankruptcy filing.
Over the years, she has struggled to find well-paying jobs, repay her student loan, and afford proper medical care for her illness.
Federal student loan borrowers are offered several repayment assistance options when they are unable to pay their monthly payments, including reducing monthly payments on an income-based repayment plan or temporarily suspending loans .
Loe tried all of these options. The income-based reimbursement ignored the portion of her income spent on excessive medical bills and stretched her budget.
In 2016 and 2017, Loe took out a total of $ 200,000 in Grad PLUS loans to attend the American Film Institute in Los Angeles, which she describes in her complaint as the “Harvard or Yale” of film schools. Despite the shock of the sticker, she saw it as an investment; attending a prestigious film school, she hoped, would propel her career in the entertainment industry and increase her income.
But finding work, even with her graduate degree and the vast experience gained during her program, was so difficult for Loe that she drove for Postmates and worked full time in a cafe to survive.
When the Covid-19 pandemic struck, she lost her job and stopped delivering food due to concerns about the virus and her compromised immune system. And his student loan balance kept increasing.
Decide to file for bankruptcy
Loe’s student loans were not enough to cover her living expenses while in graduate school. Although she lived what she describes as a “minimal” life, she ended up with almost $ 40,000 in other debt.
“I had to put a lot of things on credit just to survive, including using it to rent it out a few times,” Loe says. “Los Angeles is a very expensive city to live in with an income tax, federal tax and sales tax on your paycheck and high gas tax at the pump.”
She decided to file for bankruptcy. She also decided that she would try to pay off her student loans during the process which, after two decades of small payments, along with periods of deferral, forbearance, default and accrued interest, had swelled. to $ 357,000.
Student loan release rules have evolved over the past two decades, but not in favor of the debtor. Borrowers have to prove that their student loans are causing “undue hardship,” but the bankruptcy code doesn’t really define what that means.
The courts have interpreted the term to mean that repayment prevents borrowers from maintaining a “minimum” standard of living and that your circumstances will not change much during the remainder of the loan repayment terms. You must also prove that you made a “good faith” effort to repay the loans before considering bankruptcy.
Read more: Can you file for bankruptcy on your student loans?
It is often so difficult for federal student loan borrowers to prove they meet these criteria, however, that members of Congress have introduced numerous bills designed to make the process clearer and easier for borrowers. A recent bipartisan proposal, The Fresh Start Through Bankruptcy Act, would allow student loan borrowers to pay off federal student loans after a 10-year waiting period.
“Undue hardship should not be the only way to fix student loans in bankruptcy,” said Senator Dick Durbin (D-IL), who co-introduced the bill in August. “We should go back to what it was before 1998, when borrowers could apply for relief after a long waiting period. This system worked.
With no money to hire a lawyer, Loe filed for bankruptcy and made the unusual decision to represent herself in her case against the Department of Education.
The only form of support she relied on was that of To resolve, a non-profit organization that helps financially struggling consumers with educational resources and even an online web tool that helps them file for bankruptcy on their own. She also used her Facebook support group to guide herself through the process.
She wrote up her initial complaint herself (the 504 pages of it) and organized her evidence in a binder and tagged it with a table of contents and a cover page for each piece and how it was relevant to. his case. It took him eight weeks to put together all the documents requested during the discovery process.
“I was wary of doing [an adversary proceeding] all alone but I [wasn’t] I’m not going to try because it was going to be “hard,” Loe said. “I had nothing to lose by doing it, other than my time and effort.”
At one point, Loe says the Education Department questioned her schedule, claiming that she voluntarily entered graduate school and took out large numbers of student loans with the intention of filing for bankruptcy. It made her furious.
“I wish if I had been this smart I would have saved up a lawyer along the way to help me not play my ‘big game’ against the DOE,” Loe wrote in an email. update to Pavuluri.
A year after filing her complaint, she successfully settled $ 349,800 of her student loans with the Department of Education. Although she has not fully paid off her debt, her total amount owed now is only $ 7,200, or only 2% of the total amount she originally owed. She has to make payments of $ 60 per month for the next 10 years.
You can get a student loan discharge in bankruptcy, but should you give it a try?
There is a huge gap between the number of consumers who could benefit from liquidating their student loans in bankruptcy and those who actually try. According to an article in the Duke Law Journal, 241,000 debtors who filed for bankruptcy in 2017 held student loan debts, but only 447 filed for discharge of their loans during their bankruptcy.
“The big problem is that no one knows it’s possible, lawyers and the media describe it as impossible, and the legal fees to attempt it are too expensive,” said Rohan Pavuluri, CEO and co-founder of Upsolve. “So no one is trying.”
And although Loe has represented himself, the pundits have mixed reactions.
“For something so important, especially in bankruptcy, which is extremely difficult to get approved, you want to make sure you have an expert by your side,” says Betsy Mayotte, president and founder of the Institute of Student. Loan Advisors.
But some admire Loe’s moxie going it alone. “I like it. I hope more people try to represent themselves,” said Joshua Cohen, student loan lawyer and consumer protection lawyer in West Dover, Vt. opened the door. We need more people to take [these types of] blows. “
John Rao, a lawyer at the National Consumer Law Center, applauded Loe for drafting a detailed complaint and representing herself, but said he was “really troubled” by the terms of the agreement.
For example, if Loe misses a payment and doesn’t pay after the 10-day grace period, her entire student loan balance will become due again, with interest. Loe says she accepted these stipulations because, during her research, she saw many other regulations with the Department of Education include them.
“Politically, I don’t think the ministry [of education] should enter into these agreements, ”said Rao. “I guess that’s a risk some consumers are willing to take, but I’m really worried when it comes to an unrepresented consumer.”
Rao adds that the wording of the deal “is really unclear” as to whether or not Loe will be able to pay off the remaining debt in a future bankruptcy.
The deal says it is “with prejudice,” meaning it is a final resolution, but Rao is unsure how this could be upheld by the courts, which typically allow debtors to seek a settlement. release for undue hardship even though they tried and failed earlier and now have different conditions.
For Loe, this is all moot. She says she does not feel victimized by the Ministry of Education in any way. “They are not enemies,” she says, “my student loans are. Loe has accepted the terms of his settlement, even those pertaining to Rao, and is still grateful for it. She also does not intend to file for bankruptcy again.
Now, Loe is on a mission to change the narrative that student loan debt can’t be paid off or paid off. She wants people who can’t afford a lawyer to know that while representing yourself means taking a risk and putting a lot of effort and time into the case, it can work. She says they deserve a chance to pay off or pay off their loans, even if they don’t have the money to be represented by a lawyer.
Regardless of what people think of Loe’s case, she no longer has nearly $ 350,000 in student debt that has haunted her for decades. Now she can stop living paycheck to paycheck and focus on paying off the loan and saving for her future, which she hadn’t been able to do before.
“Renegotiating this loan gives me options and it gives me hope,” says Loe. “Hope is everything.”