Legal Assistance on Consumer Debt Matters from NYLAG.
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Dear NYLAG Partners:

It is a pleasure to continue working with you on a variety of consumer debt matters. We developed this newsletter as way to stay in touch with all of you and to provide some basic insight regarding some of the most common topics you may address in your client work. In our second newsletter, we focus on the intersection of bankruptcy and student loans. Student loans continue to pose a serious problem for many New Yorkers who cannot afford repayment, have attended “sham schools,” or have other reasons for not owing the debt. We hope this basic primer on various loan discharge possibilities available for defaulted federal student loans is useful for you.

Founded in 1990, the New York Legal Assistance Group provides high quality, free civil legal services to low-income New Yorkers who cannot afford private attorneys. We are here to help you with your consumer debt clients: Through our special staff committed to economic justice, NYLAG continues to provide assistance on cases pertaining to bankruptcy, consumer debt defense, lending, debt management and repayment, with unique expertise in discharging student loan debt. 
Discharging Student Loans in Bankruptcy
  1. While not impossible, the legal standard used for discharging student loans in bankruptcy is very high and therefore can be difficult. One must show that that payment of the debt “will impose an undue hardship on you and your dependents.” 
  2. The most common test to determine whether it is an “undue hardship” requires a showing  that: 1) the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for the debtor and the debtor’s dependents if forced to repay the student loans; 2) additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and 3) the debtor has made good faith efforts to repay the loans. 
  3. The good news is, that if one is successful in proving an undue hardship, the student loan will be completely canceled. In addition, when someone files for bankruptcy, all collection actions are automatically temporarily stopped on all of his or her debts, at least until the bankruptcy case is resolved or until the creditor gets special permission from the court to start collecting again.
  4. Proving undue hardship can be difficult and it is best to have an attorney file a borrower’s bankruptcy case for him or her. At the very least, clients should consult with an attorney to assess their likelihood of success and provide assistance with the bankruptcy petition. If a client is able to discharge the student loan debt by proving hardship, bankruptcy may be a good option. Clients should discuss the pros and cons with an attorney, keeping in mind that a bankruptcy can remain part of one’s credit history for ten years. This may impact your client’s ability to obtain a mortgage, purchase a car, and in some cases, even secure employment or rental housing. All of these factors and more should be carefully considered and discussed with a bankruptcy attorney.

    In addition to discharging your student loan in bankruptcy, there are other discharges available, depending on the client’s circumstances. The following section reviews the various discharge options:
A Quick Look at Resolving Defaulted Federal Student Loans
  1. The first step is to figure out if the borrower’s student loan(s) are federal or private. You can search on the National Student Loan Data System (NSLDS) to determine if the loan is federal. NSLDS also tells you the name of the loan servicer (the company that is collecting payments on the loan). To get information on the borrower’s federal student loan(s) from the NSLDS the borrower will need to apply for a Federal Student Aid PIN at Once the pin is active the borrower can go to the NSLDS website- If the borrower’s student loan(s) are federal, continue to step 2.
  2. The next step is to identify the company that is servicing/collecting on the loan. This is the company that needs to be contacted. This company is generally the one that sends the borrower monthly statements.
  3. The final step is to determine if the borrower is eligible for a discharge of the student loan. This is the best option for many borrowers, as it fully cancels the loan. Discharge is available to qualified borrowers, regardless of whether their loans are current, delinquent, or in default. You can find the forms needed to apply for a discharge, along with detailed instructions, at
Which discharges are available for borrowers?

Discharges Based on Problems with the School
Closed School
The school closed while the borrower was attending classes, or within 90 days after she withdrew.
False Certification
Types of false certification include:
“Ability to Benefit”- If a student does not have a high school diploma or GED, the law requires schools to test her ability to benefit from the educational program. The borrower may be eligible for a discharge if: 
  1. The school failed to administer the required ability to benefit test; or
  2. The school administered the test, but: (a) Did not give an approved test; (b) Gave the  student answers to the questions; (c) Passed the student who had, in fact, failed; or (4) Allowed the student to retake the test more times than permitted.
“Disqualifying Status”- The borrower did not meet the state requirements for employment at the time of enrollment. For example: Sally dropped out of school in ninth grade. She went to cosmetology school in a state that requires cosmetologists to have at least a tenth grade education. Sally should be eligible for a false certification discharge. 

Forgery- The school forged the borrower’s name on the loan papers or check endorsements. In order to qualify, the borrower must not have received the proceeds of the loan. This discharge does not apply in all cases where a signature was forged, only if someone affiliated with the school signed the borrower’s name without authorization.
Identity Theft- This discharge is available to victims of identity theft, but it is a hard discharge to win. In order to qualify, the borrower must provide a copy of a court verdict or judgment that conclusively determines that she was the victim of the crime of identity theft.

Unpaid Refund 
The borrower withdrew from the school, but the school did not issue the refund it was obligated to provide to the student loan servicer or the student.
Discharges Based on Disability
Total and Permanent Disability
The criteria for qualifying for a discharge based on total and permanent disability are as follows: 
  1. The borrower is unable to engage in any substantial, gainful activity due to a health condition that can be expected to result in death; or
  2. The borrower has a condition that makes them unable to engage in substantial, gainful activity that has lasted for a continuous period of not less than 60 months OR can be expected to last for a continuous period of not less than 60 months; or
  3. The Veterans Administration has determined that the borrower is unemployable due to service-connected disabilities.
As of July 1, 2013, there are three ways to meet the disability discharge standard:  
  1. Borrower can submit certification from a doctor that she is totally and permanently disabled.  She must do this within 90 days of the date of the doctor’s signature on the form; or
  2. If the borrower is receiving Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI) benefits, she can submit a Social Security Administration (SSA) notice of award for SSDI or SSI benefits stating that her next scheduled disability review will be within 5 to 7 years from the date of her most recent SSA disability determination; or
  3. Veterans who have been determined by the Secretary of Veterans Affairs to be unemployable due to a service-connected condition qualify for this discharge without having to provide additional documentation from a doctor. The Department released a letter with more information for veterans applying for this discharge. Veterans that obtain a discharge in this way are eligible for a refund of any student loan payments received by the Department of Education after the effective date of the V.A. determination.
Job Related Discharges

Public Service Loan Forgiveness
This program is available to Direct Loan borrowers that work in public service jobs for ten years and repay their loans through an eligible repayment plan. In order to qualify, you must: 
  1. Not be in default; and
  2. You must have made 120 monthly payments (payments do not need to be consecutive) on your loans AFTER October 1, 2007. Payments can be made through any one or combination of eligible repayment plans, including the new income-based repayment program and  income contingent repayment; and
  3. You must be employed in a public service job at the time of the forgiveness and must have been employed in a public service job during the period in which you made each of the 120 payments.
Client Story
Ellen was referred to NYLAG for assistance with her defaulted federal student loan. Ellen attended a for-profit trade school in the early 1990s for just two weeks. She was supposed to receive a certificate in computer skills, however, she quickly learned that the school was not going to live up to its promise of teaching her these skills. In order to attend the school Ellen took out a federal student loan, which she began repaying shortly after withdrawing. Until December 2012, she was paying almost $160 per month, despite the fact that she had only attended the school for two weeks and had not received a certificate or a diploma. Additionally, her income tax returns were garnished by the Department of Education on several occasions.

Recently, Ellen tried to return to school and was surprised to learn that she was not eligible for federal student aid because there was a judgment against her for the loan she had taken out years ago. Ellen never knew about the lawsuit and did not even realize that she had defaulted on the loan. Ellen was referred to a NYLAG attorney for assistance. Ellen met with the attorney and, after discussing her case, the attorney concluded that Ellen may qualify for an unpaid refund discharge because she had only attended the school for two weeks. The NYLAG attorney researched the school and discovered that there had been at least 20 other unpaid refund applications submitted by borrowers who attended the school and that the school was shut down in the late 1990s. The NYLAG attorney is now working with Ellen to submit a discharge application so that she can be reimbursed for the loan payments she should never have had to pay.
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