Im Going To File But Which Type Of Bankruptcy Should I Pursue
All kidding aside, you really do a need a Lawyer to handle this for you, because while I can give you some basic advice, youre going to run into a world of hurt without an expert by your side.
Got your Attorney? Great! Now that thats settled, Ill continue to avoid offering legal advice by explaining that Bankruptcies come in two exciting flavors, Chapter 7 and Chapter 13, each of which has Pros and Cons.
Depending on which type of Bankruptcy you file, if your discharge request is denied, youre going to face very different outcomes, so its important that you pick the right one or you could end up costing yourself tens or even hundreds of thousands of dollars, and you may have to sell those Vintage Star Wars figures after all .
Heres whatll happen if you fail to satisfy the Undue Hardship Tests outlined above:
- If You Fail to Satisfy the Undue Hardship Conditions
- For a Chapter 7 Bankruptcy Petition Youre screwed. Do not Pass Go. Do not Collect $200. Your Student Loan Debt is now yours for life.
- For a Chapter 13 Bankruptcy Petition Youre still screwed, but not entirely. In fact, you may still be able to pursue alternative opportunities to receive financial assistance. Yay!
And again, Im not offering legal advice here, so dont take it that way!
Claiming Undue Hardship In A Student Loan Bankruptcy Case
A Chapter 7 bankruptcy alone will not wipe away your student loan debt. In order to stop collections altogether, you will have to file a petition for a determination of undue hardship. Claiming undue hardship means that repaying your loan is too difficult and too expensive like a weight that moves the scale from struggling to suffering. This determination will take place in an adversary proceeding in bankruptcy court.
There are three criteria you must meet to successfully claim undue hardship in a student loan bankruptcy case:
This three-step measurement is also known as the Brunner Test, and if all requirements are met, your lender will no longer be able to collect loan payments from you.
If the determination of undue hardship is unsuccessful, you can still apply for Chapter 13 bankruptcy, which allows the court, rather than the lender, to determine the monthly size of repayments. These payments will often be smaller and allow for more flexibility for several years until repayments return back to normal or the borrower petitions once again for undue hardship.
I Failed To Get A Discharged But Filed Chapter 13 Bankruptcy What Do I Win
If you listened to my NOT LEGAL ADVICE and Filed Chapter 13 Bankruptcy, then failed to receive an approval for your discharge, then Ive got some good news, because you arent completely screwed!
- After Failing to Receive Approval, You Can Still:
- Set the size of your monthly student loan payments based in your Chapter 13 Plan (which could make your monthly payments very low
- Youll make these payments for 3-5 years, based on how long your Chapter 13 Plan was structured to run for, which could save you a ton of money
- Youll still owe the remaining balance on your loans after emerging from bankruptcy , but you can then attempt to discharge whatevers left of the debt AGAIN by pursuing ANOTHER Bankruptcy and facing another Undue Hardship Test
- Debt Collectors wont be able to bug you while youre making payments under the Chapter 13 plan, which is awesome, because anyone whos been hounded by them knows how terrible that can be
- Your Chapter 13 Plan may allow you to prioritize your student loan debt over other debts, allowing you to focus all your expendable finances on getting rid of that loan
Once more, because I havent said it enough, this is not legal advice and only a local bankruptcy attorney can advise you on how to proceed here. Dont listen to me I learned all I know about this stuff from Google.
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When Do Student Loans Qualify Under Undue Hardship
The criteria for demonstrating undue hardship can vary from court to court, and meeting the standard in any court can be difficult. However, there are two tests courts generally use to determine whether you’re experiencing undue hardship from your student loans. Depending on the court, there may be other tests that are used to determine whether you qualify to include student loans in your bankruptcy discharge, but these are the most common:
Duration Of Undue Hardship
The second prong of the Brunner Test requires the borrowers inability to repay the debt must be likely to continue for a significant portion of the repayment term of the loan. Just how long is a significant portion of a loans repayment term?The judges ruling in Brunner v. New York Higher Education Services Corporation indicated that the repayment term is generally ten years:
- After all, it is not unreasonable to hold that committing the debtor to a life of poverty for the term of the loan generally ten years imposes “undue” hardship.
But when the Brunner Test was issued, in 1987, student loans could be discharged after five years without requiring a showing of undue hardship. This suggests that a significant portion of the repayment term is less than five years. Otherwise, borrowers could have obtained a discharge after five years without needing to demonstrate undue hardship. A showing of undue hardship was necessary only if the borrower wanted to discharge their federal or private student loans in less than five years. A five-year standard has been used in other discharge options for federal student loans, such as Total and Permanent Disability Discharge. See 20 USC 1087. So it would be reasonable for the U.S. Department of Education to decide that student loan discharge in bankruptcy is legal when the borrowers situation is of a permanent character and has lasted for at least five years.
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Filing For Bankruptcy On Your Student Loans Is Hard To Do
In order to file bankruptcy on student loans, borrowers have to meet a multi-part test proving that they have no chance of ever being able to pay the debt back. They have to demonstrate that paying their student loans would cause them “undue hardship.”
“Congress didn’t define what it meant by ‘undue hardship,’ so it was left to the courts to decide,” says higher education expert . As such, courts use a common method called the Brunner Test to evaluate whether or not a borrower qualifies for student loan discharge through bankruptcy. Through the Brunner Test, a borrower must prove the following:
Student Loans And Bankruptcy
When one files for bankruptcy, the bankruptcy court may eliminate debts by “discharging” them. Debts that are non-dischargeable are those that generally cannot be eliminated through a bankruptcy filing and will need to be paid. For cases filed prior to October 17, 2005, a student loan may be dischargeable if the program under which your student loan was issued involved only for-profit, private entities. However, if the program is funded in whole or in part by non-profit institutions , the loan is not dischargeable in bankruptcy. For cases filed on and after October 17, 2005, and under current law, both federal and private student loans are not dischargeable in bankruptcy unless you can show that your loan payment imposes an “undue hardship” on you, your family, and your dependents. Historically, it has been very difficult to meet the requirements of “undue hardship.” Courts have generally disfavored discharge of student loans, but some courts will discharge part of a student loan if repaying it all would be an undue hardship. In order to have a student loan discharged on undue hardship grounds, you must file a separate motion with the bankruptcy court and then appear before the judge to explain your hardship.
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Are Student Loans Dischargeable In Bankruptcy
In bankruptcy, you can discharge many different types of debt. That includes unsecured debt like credit cards, personal loans, collection accounts, medical bills, business loans and, in some cases, even student loans.
By law, bankruptcy trustees are required to prioritize certain types of debts in regard to when they get paid. For example, things like child support and alimony, unpaid taxes and criminal fines must be paid before your unsecured debts, which are considered non-priority.
While priority debts generally cannot be discharged, you may be able to be released from accounts included in the non-priority category. Student loans are counted among non-priority debts, but you’ll still have a really hard time discharging them in Chapter 7 or Chapter 13 bankruptcy. The only exception is if you can prove that your student debt has caused undue hardship to yourself and your dependents.
When To File Student Loan Bankruptcy
There’s no set time to file student loan bankruptcy. You can file it before your bankruptcy case closes. Bankruptcy law also allows you to file it after the court closes your bankruptcy case.
From my perspective as a student loan lawyer, I recommend people should consider filing student loan bankruptcy when:
- they can no longer afford their private student loans and can’t afford a settlement
- they have a physical disability that limits their ability to work but does not qualify them for a total and permanent disability discharge
- they have defaulted a second time on a federal student loan and can’t get out of default
- they cannot get a professional license
- their elderly and have made a good faith effort to repay their student loans
If you decide you’re ready to file student loan bankruptcy after looking at your situation, the next step is to meet with a bankruptcy attorney to determine what bankruptcy you should file, Chapter 7 or Chapter 13.
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Families Not Just Students Feel The Weight Of The Student Loan Crisis
For those who do try, though, Iuliano’s research finds that about half the time the person gets some or all of the student loan debt erased. One study he did found that they got help through bankruptcy about 40% of the time. And he says more recent data from this past year show that figure rising to more than 50% of the time.
“So I think that’s really important for bankruptcy attorneys to see that there are judges out there who are willing to grant undue-hardship discharges and that people are much more likely to obtain relief in bankruptcy for their student loan debt,” Iuliano says.
Just this month, a federal judge in New York discharged more than $220,000 in student loans for a borrower. In her ruling, Chief Bankruptcy Judge Cecelia Morris criticized the fact that even many lawyers “believe it impossible to discharge student loans.” She added, “This Court will not participate in perpetuating these myths.”
Robert Lawless, a law professor at the University of Illinois, says, “I think we’re reaching a tipping point with what the bankruptcy courts are doing.” He says he hopes more people are able to get help through bankruptcy.
Take Steps Early To Avoid Credit Damage
If you’re not sure you can make your student loan payments, take steps early to avoid missing payments and default. Both of these scenarios can damage your credit score, making it difficult to qualify for refinancing or get approved for favorable credit terms in the future.
As you decide the best path forward for you, monitor your credit regularly to understand how your actions impact your credit score. Credit monitoring can also help you spot potential issues before they cause significant damage.
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Other Forms Of Student Debt Relief
While current bankruptcy law does not allow student loans to be discharged, there are other options for debt relief. The alternatives to bankruptcy discharge have mostly occurred in the form of income-driven repayment plans, of which there are currently four. Borrowers with private student loans also have the option to refinance to get a lower interest rate.
Chapter 13 Bankruptcy Can Delay Student Loan Payments
Sinceyou are protected by the automatic stay, you do not have to makeregular student loan payments during Chapter 13 bankruptcy. Your studentloans will be paid through your Chapter 13 payments according to theterms of your plan. If you have little or no disposable income, you maynot have to pay anything towards your student loans in your repaymentplan. However, keep in mind that interest will continue to accrue onyour student loans during bankruptcy and you will still be required topay them back after your case is closed.
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How Biden Helped Create The Student Debt Problem He Now Promises To Fix
The former vice-president and 2020 presidential hopeful backed a 2005 bill that stripped students of bankruptcy protections and left millions in financial stress
In 10 weeks time Joe Biden will lay Joes vision for America at the feet of Iowas caucus-goers in the hope that the first voters in the Democratic presidential race will put him on the road to the White House.
Among his promises is that he will fix the student loan crisis saddling 45 million Americans with crippling debt now totalling a staggering $1.5tn. One idea is to allow people struggling to repay private student loans owed to banks and credit card companies to discharge them in bankruptcy.
The pledge is one of the most striking policies on offer from Democratic candidates in the 2020 race, given how the problem Biden now proposes to resolve came about in the first place. Private student loans were largely stripped of bankruptcy protections in 2005 in a congressional move that had the devastating impact of tripling such debt over a decade and locking in millions of Americans to years of grueling repayments.
Biden was one of the most powerful people who could have said no, who could have changed this
The Republican-led bill tightened the bankruptcy code, unleashing a huge giveaway to lenders at the expense of indebted student borrowers. At the time it faced vociferous opposition from 25 Democrats in the US Senate.
Is It Even Possible To Discharge Student Loan Debt In Bankruptcy
Discharging your student loans in bankruptcy isnt impossible, but it requires navigating a challenging process that can be difficult to prove. If youre going to try to get out from under your loans in a bankruptcy, you should understand the requirements to qualify.
Getting your loans discharged in bankruptcy is theoretically possible, but its not your ordinary bankruptcy proceeding, and its incredibly difficult, says Mark Kantrowitz, publisher and vice president of research for SavingForCollege.com.
According to one study, only 0.1% of student loan borrowers declaring bankruptcy even try to get their student loans discharged. Of that fraction, 40% succeed. In other words, just 0.04% of people who have filed for bankruptcy and sought to have their loans discharged received either a full or partial discharge of their student loans.
If nothing else, these stats prove that student loan discharge is possible. But the legal requirements are discouraging and for those who do try, its a tough proposition.
Under current law, student loans cant be claimed in a bankruptcy except in certain circumstances. The only way these loans can be discharged is if theyre found to cause undue hardship on the borrower or the borrowers dependents.
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Student Loan Bankruptcy Timeline
Since it first made student loan debt nondischargeable in bankruptcy, Congress has changed the law 5 times:
Click here to view a slide deck showing the history of these amendments.
Qualifying For Student Loan Bankruptcy Discharge
A discharge of your student loans may be possible if you prove you have an undue hardship that prevents you from making student loan payments, orwith private loansif the loans did not provide an educational benefit.
With federal student loans, there is no standard set of guidelines for demonstrating undue hardship. Most courts rely on the Brunner Test, which requires you to prove that:
- You wouldnt be able to maintain a basic living standard if you made loan payments.
- Your financial hardship will last an extended amount of time.
- You made a good faith effort to repay your loans before filing for bankruptcy.
Not only are these circumstances extremely challenging to prove, the Brunner Test is somewhat subjective. Not only every state, but every jurisdiction will have different standards in determining whether the Brunner Test applies, said Leslie Tayne, a financial attorney and the founder and managing director of Tayne Law Group, in an email to The Balance.
Its not the only test that exists, however. The courts of the Eighth Circuit, for example, use the totality of circumstances test, which looks at the borrowers overall situation. This benchmark is considered less restrictive than the Brunner Test.
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Consider Consulting With An Attorney
You’ll find the Brunner test or other standards applied to Chapter 7 and Chapter 13 debtors in lots of court cases. Knowing how the court in your jurisdiction ruled previously could help you determine the likelihood of your success.
If you have a substantial amount of student loan debt, it might be worthwhile to consult with a local bankruptcy attorney. The chances are that if you decide to litigate either the dischargeability issue or assert a defense to the loan in bankruptcy court, you’ll need an attorney to represent you.