It’s widely acknowledged that student loans are an obstacle in New York bankruptcy, but there are unusual times when student loan debts can help debtors choose the chapter they wish to file in. For higher-income debtors it’s usually harder to file in chapter 7 because their incomes exceed the median for families in their state, requiring them to take the means test. (In New York, that amount is $48,109 for single earners.) Although many debtors can still pass the means test, others choose to file in chapter 13 instead. For those who do, however, their student loan debts are still nondischargeable, and they’re non-priority debts, meaning they receive distributions from the repayment plan after most of the other debts do.
Debtors in this situation have three options:
- They can include the debts in the repayment plan and hope the payments are sufficient to cover the required monthly payments.
- They can try to pay on the plans outside of the repayment plan, or at least enough to keep the interest from growing.
- Alternatively, they can try to claim that the student loans are a “special circumstance” that should permit them to keep their cases in chapter 7 even if they would otherwise fail the means test.
What are “special circumstances” for bankruptcy petitioners trying to stay out of chapter 13? The topic appears in Section 707(2)(B) of the Bankruptcy Code. Just because a debtor fails the means’ test doesn’t mean it’s impossible to show the filing isn’t abusive. “Special circumstances” allow debtors to rebut the presumption if they can show that their financial situation requires them to spend more than would normally be the case and there is no alternative. The examples Section 707(2)(B) gives are medical conditions or calls to active duty for soldiers.
Showing “special circumstances” requires debtors to provide documentation of the expenses and “a detailed explanation … that make such expenses or adjustment to income necessary and reasonable.” Then the debtor must attest to the circumstances under oath. The Bankruptcy Code really doesn’t want people to plead “special circumstances” lightly. Finally, the added expenses must not be less than $10,000, or 25 percent of the greater of the debtor’s non-priority unsecured claims or $6,000.
For student loan debtors, if their debt burdens are high enough that their balances would grow to unpayable levels if they couldn’t be covered by a chapter 13 repayment plan, then they might be able to plead “special circumstances.” It can also help if debtors can show that the only beneficiaries of a chapter 13 bankruptcy are the debtor’s attorney and the bankruptcy trustee.
Although it’s not a dire emergency like a medical problem or a call to serve our country, it is sometimes possible to claim that high student loan balances are a valid reason for why a debtor with a decent income can file in chapter 7 rather than chapter 13. It takes the skills of an experienced New York bankruptcy lawyer to make the case to the bankruptcy court, though.
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.