A few years ago, I discussed how the federal government changed its process for allowing qualifying debtors to apply for a non-bankruptcy discharge their student loans due to disability. Until 2013, the process required disabled debtors to slog through a bureaucratic process, even if the Social Security Administration had independently judged them as “totally and permanently disabled” (TPD). The government changed its rules, permitting a TPD finding by the SSA to be good enough for the Department of Education. Now, though, the department is going even further: It’s actively reaching out to 387,000 debtors to notify them that they might qualify for a TPD discharge of their student loans.
The department enhanced its ties to the SSA, and they pooled their resources to identify debtors who overlap with Social Security beneficiaries designated as “medical improvement not expected,” or TPD. As many as 179,000 of the total debtors, 46 percent, are in default on their student loans, and the Treasury Department has certified 100,000 of these defaulters for the Treasury Offset Program, which garnishes wages and government benefits to repay student loans. With as much as $7.7 billion at stake, disabled debtors stand to gain quite a bit by the Education Department’s action.
The department will send these debtors a letter informing them of their eligibility for TPD discharge and the process required to obtain one. These debtors will not need to establish their eligibility for a TPD discharge. They only need to sign and return the letter to the government. The government will follow up with debtors who don’t return the letter promptly.
TPD discharge helps many disabled student-loan debtors, but there’s a catch: Any debts discharged under the TPD program are considered income for the debtor. This means they may have to pay a hefty tax bill to the government, which can jeopardize their savings. As a result, any eligible debtors will need to take the consequences of a TPD discharge quite seriously.
If debtors are lucky, however, Congress might step in and help out. A few U.S. senators introduced a bipartisan bill that would end taxation on student loans canceled by the death of the debtor or TPD disability. One story that motivated them was of grieving parents receiving a $24,000 tax bill for the cancellation of their deceased child’s debts. If this law is passed, debtors receiving a TPD discharge would pay no income tax on their canceled loans.
387,000 debtors is a large number, and the amount of debt they owe is quite substantial. The Department of Education is essentially doing something that bankruptcy cannot: erase large numbers of student loans. If you aren’t eligible for a TPD discharge or the government is threatening to garnish your wages or Social Security benefits to repay your student loans, then you should talk to an experienced New York bankruptcy to evaluate your options. Chapter 7 bankruptcy can free up income dedicated to other debts and chapter 13 has its benefits as well.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.