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It is a central tenet of bankruptcy law that “the honest but unfortunate debtor has a right to a ‘fresh start.’” This fundamental principle does not, however, apply to the debtor who cannot pay his or her student loans. Rather, the bankruptcy code provides that unless excepting such extreme circumstances, a debtor is not entitled to a discharge of his or her student-loan debt.

Currently there is an overwhelming amount of student loan debt – over $1.1 trillion in the United States! Many people file for bankruptcy, eliminate all of their credit card debt, medical bills and the like but still emerge from bankruptcy with tens of thousands of dollars in student loan debt.  So the question of many of my clients is what, if anything, can be done to help with the student loans.

As with most legal questions the answer depends on several factors.  The first that needs to determined is whether your loans are federal or private.  Federal loans have several programs that can reduce your monthly payment or even eliminate the loan.  Most do not do not involve filing bankruptcy.  Here are several options:

1. Disability: Borrowers may be eligible to have their federal student loan debt discharged because of a total and permanent disability.
2. Loan Rehabilitation: Federal regulations allow borrowers who default on repayment of their loan a one-time opportunity to bring their loans out of a default status and repair the negative credit information reported to credit bureaus. Payment amounts are set at a reasonable rate and borrowers must make nine consecutive on-time payments over a 10-month period. Completing rehabilitation restores a borrower’s loans to good standing and helps to repair credit. Entering a loan rehabilitation agreement has immediate effect on a borrower’s defaulted loans: it stops all collections activity and legal proceedings, prevents wage garnishment, and it may protect a borrower’s state and federal tax refunds from IRS offsets. 
3. Closed School Discharge: Borrowers whose school closed before they could complete the program of study may be eligible for discharge.  
4. Bad School: A borrower’s student loans can be discharged if a school falsely certified the student’s eligibility for a federal student loan on the basis of ability to benefit from the education, signed the borrower’s name without authorization by the borrower
5. Death Discharge: If an individual borrower dies, or the student for whom a parent received a PLUS loan dies, the obligation of the borrower and any endorser to make any further payments on the loan is discharged. 
6. Teacher Loan Forgiveness Program: Teachers in low-income areas and those who teach math or science are eligible for forgiveness of up to $17,500. 
7. Public Service Loan Forgiveness: Borrowers who make 120 qualifying payments under the IBR, ICR, or 10-year fixed payment schedule while employed in the public sector are eligible to have any balance remaining on their student loan debt forgiven. Public service includes employment with most local, state, federal, tribunal nation, or § 501(c)(3) corporations. (Direct Loan Program loans only). 
8. September 11 Survivors Discharge: Survivors of or eligible victims of the September 11 attacks may request discharge of their student loan debt. (Direct Loan Program loans only).

Unfortunately, there are far fewer options when it comes to dealing with private student loans.

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In the year 2007, the Florida Supreme Court issued its opinion in Chames v. DeMayo, 2007 WL 4190796 (Florida December 20, 2007) upholding the 3rd District Court of Appeals' decision (on rehearing) that the waiver of the Florida homestead exemption in an unsecured agreement is unenforceable. The court applied the doctrine of stare decisis and refused to recede from precedent of over a hundred years that the homestead exemption cannot be waived in an unsecured agreement. See Carter's Adm'rs v. Carter, 20 Fla. 558 (1884), Sherbill v. Miller Mfg. Co., 89 So.2d 28, 31 (Fla.1956).

In this case, an attorney who held an unsecured claim for legal fees based on a retainer agreement asked the court to recede from its precedent based on three arguments. First, based on a certain amendment to article X, section 4 of the Florida Constitution. Second, based on a purported national trend approving such waivers. Third, based on other Florida Supreme Court holdings that constitutional rights may be waived. The court rejected each of these arguments in turn.

The creditor first argument was that the 1985 amendment to article X, section 4 of the Florida Constitution, which replaced the phrase "the head of a family" with "a natural person" changed the purpose of the homestead exemption from that of one protecting the family into a personal right that may be waived. The court found no intent on the part of Florida voters to change the fundamental purpose of the Florida homestead when they expanded the homestead protection by no longer requiring one to be the head of a family to claim a homestead. The court stated that the creditor's argument overlooked the State's interest in protecting the home so that homeowners are not reduced to destitution and public charge. Havoco of Am., Ltd. v. Hill, 790 So.2d 1018, 1020 (Fla. 2001).

The creditor next argued that there has been a shift in the position of other states on the issue of homestead exemption waiver. The court noted that if this were true, it would furnish a reason to reconsider its precedent and that it has been willing to recede from precedent when it conflicted with the law in a majority of states. See, e.g., Fridovich v. Fridovich, 598 So.2d 65, 69 (Fla. 1992). The court stated that due to differing constitutional and statutory provisions, any such trend is difficult to discern and "to the extent it can be discerned, the trend appears to go in the opposite direction." The court found that the "majority of jurisdictions that have addressed the issue (whether by constitution, statute, or judicial opinion) do not permit a general waiver of homestead or personal property exemptions in an executory contract."

The court did note some cases from other states that found a waiver of homestead exemption in other manners but concluded that they did "not inform our analysis" as they were in different contexts. In Shuler v. Wallace, 61 Haw. 590, 607 P.2d 411, 414 (Haw. 1980) the court found that the failure to assert the right to claim an exemptions results in a waiver. In Cameron v. McDonald, 216 N.C. 712, 6 S.E.2d 497, 499 (N.C.1940), the court found that the party was estopped from relitigating his right to a homestead when he failed to assert his right.

Lastly, the creditor argued that the waiver of the homestead exemption should be permitted because the court has permitted the waiver of other constitutional rights. The court held that although most personal constitutional rights may be waived, an individual cannot waive a right designed to protect both the individual and the public. The court reiterated that "the homestead exemption protects not only the debtor, but also the debtor's family and the State." See Havaco, 790 S.2d at 1020.

The court recognized the trend in permitting the waiver of personal constitutional rights, especially rights given to criminal defendants. But the court noted that the waiver must be made knowingly, voluntarily and intelligently. Indeed, the court noted that it recently allowed a civil plaintiff to make a certain waiver with regard to a civil attorney fees but imposed safeguards such that the attorney must inform the client about his constitutional right, the possible consequences of waiver, and the initialing of six separate paragraphs. See R. Regulating Fla. Bar 4-1.5(f)(4)(B). In contrast, in this case, the court noted that the waiver was contained on page four of a six page single-spaced contract and at the end of a 118-word sentence.

The court went on point out that the Florida Constitution and case law do permit the waiver of the Florida homestead if accomplished in a certain manner. The court noted Carter and Sherbill do not absolutely prohibit the waiver of the homestead exemption, but they require that a waiver be accomplished in the manner that the article X, section 4 of the Florida Constitution prescribes: by "mortgage, sale, or gift." What is prohibited is a "general waiver of the homestead exemption in an otherwise unsecured instrument." The court stated that "[r]equiring that a waiver of the homestead exemption be made in the context of a mortgage assures that the waiver is made knowingly, intelligently, and voluntarily."(305) 891-4055 - Jordan E. Bublick is a Miami Bankruptcy Lawyer with over 25 years of experience in filing Chapter 13 and Chapter 7 Bankrkuptcy Cases.

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I recently received this email from a prospective client (“Jane”) seeking to have her student loans discharged in bankruptcy.  Do you see the problems with this case?

I am permanently disabled due to cognitive decline resulting from a craniotomy to repair one of three aneurysms. I also suffer from back pain, anxiety, depression and panic attacks. In addition to my 2012 brain and gallbladder surgeries, I underwent back surgery in 2011 and two foot surgeries in 2010, and due to complications from my back surgery I have not been able to return to work. . I was very recently approved for disability retirement after 25 years as an employee with the federal government.  I also receive SSI.   I filed a chapter 7 in 2008 and am unsure what my options are in regard to having my student loans forgiven. I am seeking a full discharge.

Let’s start with the most immediate problem – currently, Jane’s eligibility to file bankruptcy.  Under Bankruptcy Code Section 727(a)(8), Jane is not eligible to file Chapter 7 for eight years after previously filing a Chapter 7 1.  Depending on when in 2008 she filed, she would have to wait until at least 2016 before filing a second case.Assuming for sake of argument that Jane was eligible to file Chapter 7, a practical problem she would face using bankruptcy to discharge her student loans would be that of cost.  Bankruptcy Code Section 523(a)(8) says that student loans are not dischargeable in bankruptcy unless the debtor can show that not discharging them would constitute undue hardship.In defining undue hardship, bankruptcy judges have come to rely on an analysis set out in a 2nd Circuit case called Brunner vs. New York State Higher Education Services Corp.  The Brunner test considers three factors to determine whether student loans can be discharged in bankruptcy:

1. has the debtor made a good faith effort to repay his loans
2. based on current income and expenses, can the debtor maintain for himself and his family a minimal standard of living if forced to pay his loans; and
3. are the debtor’s financial circumstances likely to remain during a significant portion of the student loan repayment period

Based on what Jane writes, I think she would have a reasonable argument that she meets all three elements of the Brunner test, although in general bankruptcy judges have been reluctant to discharge student loans.  Regardless, Jane would have the burden of filing a lawsuit in bankruptcy court to put the discharge issue before the judge.  Bankruptcy litigation is not cheap – it is likely that the cost of this type of litigation could reach $5,000.I think that there are better options than bankruptcy for Jane.First, she has the option of doing nothing.  If Jane’s only source of income is SSI and she has no assets, she is essentially judgment proof.  SSI (which is the welfare type of disability) may not be garnished by anyone, even the Department of Education.  Jane may end up with judgments filed against her but those judgments are uncollectible and will remain so unless her life circumstances change dramatically.Second, if Jane’s student loans are federally issued or federally guaranteed, she can apply for loan forgiveness based on disability 2.  The Department of Education has recently changed its rules regarding disability forgiveness and Jane’s SSI disability determination may be enough to convince the government to forgive her loans.Third, if Jane’s loans are federally issued or guaranteed, she could enter an income based repayment plan.  Assuming her income remains low, the income based repayment plan formula would likely call for a zero dollar payment.  At the end of the repayment term (usually 20 years), the loans would be deemed satisfied and Jane’s liability would end.So, Jane has a variety of options and based on the information at hand bankruptcy would be the least desireable.

1. assuming that the previous Chapter 7 resulted in a discharge ↩
2. Disability forgiveness does not generally apply to private student loans. ↩

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