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Many Americans turn to bankruptcy when their debts become overwhelming and unmanageable. But there is one form of debt that most believe is almost impossible to pay off through bankruptcy: student loans.
Melissa Loe, a 47-year-old living in Los Angeles, knew this – but decided that hard doesn’t mean impossible. She managed to pay off 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 to thousands of dollars in student debt? Or is she just an outlier?
Taking out student loans for a better future
Loe’s story is similar to that of many Americans: She took out government student loans in hopes of gaining the knowledge and resources to have a successful career. But as someone living with type 1 diabetes and multiple complications, her medical costs skyrocketed – and her student loans became an inexorable force preventing her from achieving her financial and general wellbeing.
“If you’re me and you have to buy insulin, you have to pay rent and a student loan – but you only have enough money to pay two – what do you do?” Loe says.
Loe was in school rather than school for years due to her illness, and first took out a government student loan in 1997 to complete her bachelor’s degree. Her student loans first matured in 2005, but she was unable to pay them due to her increased medical costs, according to her bankruptcy filing.
Over the years, she struggled to find well-paying jobs, pay her student loans, and get adequate medical care for her illness.
Federal student loan borrowers are offered several repayment assistance options when they cannot afford their monthly payments, including lowering monthly payments under an income-based repayment plan or temporarily deferring the loans.
Loe tried all of these options. Income-based repayment did not take into account how much of their income was being spent on excessive medical expenses and was a strain on their 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 sticker shock, she saw it as an investment; She hoped that attending a prestigious film school would advance her career in the entertainment industry and increase her income.
But despite her college degree and the extensive experience she gained while studying, it was so difficult for Loe to find a job that she drove for postmates and worked full-time in a coffee shop to survive.
When the Covid-19 pandemic broke out, she lost her job and stopped delivering food due to concerns about the virus and her weakened immune system. And her student loan balance kept rising.
Decision to file for bankruptcy
Loe’s student loans weren’t enough to cover her living expenses while she was studying. Despite leading a “minimal” life, she ended up with nearly $ 40,000 in other debts.
“I had to put a lot of things on credit to survive, including renting out a couple of times,” says Loe. “Los Angeles is a very expensive city with income, federal, and sales taxes that come off your paycheck and a high gasoline tax at the pump.”
She decided to file for bankruptcy. She also decided to try to pay off her student loans during the process – which had grown to $ 357,000 over two decades of small payments along with deferral, deferral, late payment, and accrued interest.
The rules for paying student loans have evolved over the past two decades, but not in favor of the debtor. Borrowers are required to demonstrate that their student loans are causing “undue hardship,” but bankruptcy law does not define what that means.
Courts have interpreted the term to mean that repayment will prevent the borrower from maintaining a “minimal” standard of living and that your situation will not change materially during the remainder of the loan repayment terms. You will also need to demonstrate that you have made good faith efforts to pay off the loans prior to considering the bankruptcy.
Read more: Can you file for bankruptcy on student loans?
It is often so difficult for federal student loan borrowers to prove they meet these criteria, but members of Congress have tabled numerous bills to make the process clearer and easier for borrowers. A new bipartisan proposal, The Fresh Start Through Bankruptcy Act, would allow student loan borrowers to redeem federal student loans after a 10-year waiting period.
“Unreasonable hardship shouldn’t be the only way to tackle student loans in bankruptcy,” said Senator Dick Durbin (D-IL), who introduced the bill in August. “We should go back to what was before 1998, when borrowers could get relief after a significant wait. This system worked. “
With no money to hire a lawyer, Loe filed for bankruptcy and made the unusual decision to represent her case against the Ministry of Education.
The only form of support she relied on was from Dissolve, a nonprofit that helps consumers in financial distress with educational resources and even an online web tool to help them file for bankruptcy themselves. She also used the Facebook support group to guide herself through the process.
She wrote her first complaint herself (all 504 pages) and put her evidence in a folder and labeled it with a table of contents and a cover sheet for each exhibit and how it was relevant to her case. It took her eight weeks to gather all the documents requested during the investigation.
“I was careful with [an adversary proceeding] alone but me [wasn’t] I won’t try because it would be “difficult,” says Loe. “I had nothing to lose except my own time and efforts.”
At one point, Loe says, the Department of Education questioned her schedule, stating that she entered graduate school on purpose and took out a large number of student loans with the intent to file for bankruptcy. It made her angry.
“I would hope that if I had been that smart, I would have saved up for a lawyer on the way to help me keep my ‘big game’ against the DOE,” Loe wrote in an email update to Pavuluri .
A year after she filed her lawsuit, she successfully settled $ 349,800 of her student loans with the Department of Education. Although she hasn’t paid her debt in full, her total amount now due is only $ 7,200 – only 2% of the total amount she originally owed. She’ll have to pay $ 60 a month for the next 10 years.
You Can Redeem Student Loans In Bankruptcy – But Should You Try?
There is a huge disparity between the number of consumers who could benefit from paying back their student loans in the event of bankruptcy and those who actually try. According to an article in the Duke Law Journal, 241,000 borrowers who filed for bankruptcy in 2017 held student loan debts, but only 447 filed for their loans to settle during their bankruptcy.
“The big problem is that nobody knows this is possible, lawyers and the media are calling it impossible, and the legal fees are too expensive to try,” said Rohan Pavuluri, CEO and co-founder of Upsolve. “So nobody tries.”
And although Loe represented himself, experts reacted mixed.
“For something so important, especially bankruptcy that is extremely difficult to approve, you want to make sure you have an expert by your side,” said Betsy Mayotte, president and founder of the Institute of Student Loan Advisors.
But some admire Loes Moxie when he does it alone. “I love it. I hope more people are trying to represent themselves,” said Joshua Cohen, student loan attorney and consumer protection attorney in West Dover, Vermont. “She opened the door. We need more people to take away [these types of] Shots. “
John Rao, an attorney at the National Consumer Law Center, applauded Loe for drafting a detailed complaint and representing herself, but said he was “really concerned” with the terms of the agreement.
For example, if Loe misses a payment and does not pay after the 10-day payment period has expired, her entire student loan amount will be due again – with interest. Loe says she accepted these terms because during her research she saw that many other settlements with the Department of Education contain them.
“From a political point of view, I don’t think the department [of education] should enter into these agreements, ”says Rao. “I think it’s a risk some consumers want to take, but I only really worry when it’s an unrepresented consumer.”
Rao adds that the language in the agreement is “really unclear” as to whether Loe will be able to pay the remaining debt in a future bankruptcy.
The agreement states that it is “with prejudice,” d circumstance.
For Loe, all of this is controversial. She says she doesn’t feel like a victim of the Ministry of Education in any way. “You are not the enemy,” she says, “it is my student loans.” Loe agreed to the terms of their agreement – even those that concern Rao – and is still grateful for it. She also never plans to file for bankruptcy again.
Now Loe is on a mission to change the narrative that paying off or paying off student loan debts is impossible. She wants people who can’t afford a lawyer to know that while a representation must take a risk and put a lot of effort and time into the case, it can work. She says they deserve to have a chance to pay off or settle their loans even though they don’t have the money to legal representation.
Regardless of what people think of Loe’s case, she no longer has nearly $ 350,000 worth of debt that haunted her for decades. Now she can stop living from paycheck to paycheck and focus on actually paying off the loan and saving for her future – something she couldn’t before.
“Renegotiating this loan gives me options and that gives me hope,” says Loe. “Hope is everything.”