Borrowers With High Necessary Expenses
The U.S. Department of Education should also not oppose an undue hardship petition when the borrower has high ongoing medical and disability-related expenses for themselves or a dependent. Total and Permanent Disability does not apply when it’s the borrowers dependent who is disabled, as opposed to the borrower. Nevertheless, borrowers may have high medical and disability-related expenses that affect their ability to repay their student loans. Likewise, the borrower may be unable to work a full-time or better-paying job because of the need to take care of a disabled child or elderly parent. If the borrower has a severe disability that seems likely to qualify for a TPD discharge, the U.S. Department of Education should not oppose the undue hardship discharge. The availability of disability discharges and other accommodations should not bar a disabled borrower from seeking an undue hardship discharge.The U.S. Department of Education should also consider whether the financial settlement from a divorce or separation significantly affects the borrowers ability to repay the debt. The Tax Cuts and Jobs Act of 2017 eliminated the above-the-line deduction for alimony payments for people who get divorced in 2019 or a later year.
This means that adjusted gross income is higher for taxpayers who pay alimony. Accordingly, the payments made under an income-driven repayment plan may no longer reasonably reflect the borrowers ability to repay their student loans.
How Does Bankruptcy Impact My Student Loan Debt
In some cases you will be able to include your student loan debt in a student loan bankruptcy, but you must meet certain conditions for your student loan debt to be included in your bankruptcy and eliminated when you receive your bankruptcy discharge.
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Generally you can only include student loan debt in bankruptcy if you have not been a student for more than 7 years, or for less time if you meet the hardship requirements.
When you declare bankruptcy you will be ineligible to receive further funding from the Student Aid funding program in your province for a certain period of time.
In BC, the length of time you will be ineligible for funding is 10 years or 8 years if you declared bankruptcy under financial hardship conditions.
Student Loan Bankruptcy: The Seven-Year Rule
When you receive your bankruptcy discharge you will only receive a release from the obligation to pay off your student loans if you file for bankruptcy at least seven years from the day you stopped being a part-time or full-time student.
In other words, you can only eliminate student loan debt in bankruptcy if you stopped being a student more than 7 years ago.
If you were a student less than 7 years ago, your student loan debt cannot be included in your bankruptcy and you must continue paying your student loan debt or seek another option for getting out of debt.
Consumer Proposal: Student Loans
A consumer proposal is an option to negotiate repayment terms with your creditors through a Licensed Insolvency Trustee, for much less than what you owe today. Student loans can be included in a consumer proposal, and are eligible for release, if they meet the seven-year rule.
Stay of Proceedings When you file personal bankruptcy or make a consumer proposal, one of the major benefits is a stay of proceedings. This prevents your creditors from taking further action to collect on your debts, including student debt.
- If your debts are eligible for automatic discharge in a bankruptcy or release in a consumer proposal, then, once your bankruptcy or proposal is completed, your debts go away. No further payment is required.
- If your student debts are less than 7 years old however, your student loan lender, even the government, is still unable to collect while you are bankrupt or in a consumer proposal. You can opt to continue to make payments against your non-dischargeable student debt while in a consumer proposal. Many find this feasible since their credit card and other debt payments, have been eliminated. As long as your student loan lender files a claim in your consumer proposal, they will received their pro-rata share of the consumer proposal payments you make, like any other unsecured creditor. This dividend further reduces any student loan debt that remains upon completion of your consumer proposal.
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It’s A Very High Success Rate
“I have never seen $350,000 of debt being discharged,” said Rohan Pavuluri. “You can imagine why people don’t even try.”
Pavuluri is the CEO of Upsolve, a nonprofit organization that helps people file for bankruptcy for free. Loe used Upsolve’s app to file her initial case, and she is now pushing for the company to expand its services to help people like her file their own student loan discharge.
Although the amount of Loe’s debt makes her case unusual, her success in having it discharged isn’t as rare as many believe. In fact, student debtors who try to wipe out education loans in bankruptcy tend to succeed more than half the time, according to research from Jason Iuliano, a law professor at the University of Utah.
In 2017, 447 debtors tried to get student loans cleared in bankruptcy, Iuliano noted in a recent paper. Of those, 234 nearly 60% either won the case or settled with their creditors.
“It’s a very high success rate once you actually go before the judge and say, ‘I deserve a discharge,'” Iuliano told CBS MoneyWatch.
The larger issue, said Iuliano, is that most people don’t even try. While about a quarter of a million people with student loans file for bankruptcy each year, only a few hundred take the extra step of filing an adversary proceeding to try to clear their student debt because most believe it’s impossible.
Alternatives To Student Loan Bankruptcy
Bankruptcy is not the best fit for everyone. Here are some options to consider to help you deal with your student loan debt:
Refinance for a lower interest rate. Depending on your student loan balance, credit score, and income, you may be able to find a lender that offers a much lower interest rate. While refinancing won’t get rid of the debt, the lower interest rate may make it easier to pay off your loans faster.
Request a deferment or forbearance. If you’re struggling with your private student loans, ask for a deferment or forbearance to give you some relief. You can also ask your student loan servicer if they offer interest rate reduction programs and other flexible repayment options.
Apply for an income-driven repayment plan.IDR Plans are affordable repayment plans offered by the federal government to federal student loan borrowers. These plans allow you to pay 10 to 15% of your discretionary income for 20 to 25 years. Any loan balance remaining after you make your final payment will be forgiven.
Check eligibility for discharges. The federal government and some private lenders will discharge your student loan debt due to total and permanent disability. You may also be entitled to a discharge if your school misrepresented your ability to transfer credits or get a job or if the school closed.
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Get Student Debt Relief
If you are looking for relief from student loan debt, a bankruptcy or consumer proposal can eliminate certain student debt. Student debt can be included in a bankruptcy or consumer proposal depending on how old your student loans are, whether your student debts are a private student loan with a bank or are government guaranteed student loans, and what your budget can afford. Our licensed insolvency trustees can help you review the pros and costs of each student debt relief option and decide which will work for you. Here is some information you may want to talk about.
Student Loans: California Woman Sees Nearly $350000 Discharged In Personal Bankruptcy While Serving As Her Own Lawyer
A California woman with more than $350,000 in student debt served as her own lawyer in personal bankruptcy and saw 98% of her loans discharged in the latest case in a growing trend.
Court filings show that the Education Department and the Los Angeles-based woman, Mis Loe, agreed on August 30 that Loe would pay $7,200 of her $356,637.82 in outstanding loans .
Once Loe completes the $7,200 payment by October 2031, according to the agreement, she shall be discharged of the remaining balance of the student loan debt, pursuant to her Chapter 7 discharge order.
Furthermore, the case shows that regular people especially those in extraordinary personal circumstances are able to win for student debt discharges without a lawyer.
Its not a straightforward, easy process the data has been consistent over the past decade folks with attorneys dont do any better than individuals who dont have attorneys in this specific context of litigating the adversary proceeding, Jason Iuliano, associate professor at the University of Utah and an expert on student loan bankruptcy law, told Yahoo Finance. They both tend to get about the same level of favorable outcomes. And I cant think of another area of law where thats true, where having an attorney makes you worse off.
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Why Are Student Loans Not Dischargeable In Bankruptcy
There is no certain answer to why you still have to repay your student loan after you are discharged. But it is arguably because it is a payment from the UK Government and because you will not have to repay the debt unless you earn above the threshold.
Students are either on repayment Plan A or repayment Plan B. Those on the former only repay 9% of earnings above £382 per week, while those on the latter repay the same amount over £524 per week.
What Do You Need To Consider Before You File Bankruptcy
Now that you know what happens to student loans in Chapter 7 and 13, you might be ready to move forward. But remember: Bankruptcy should be treated as a last resort under any circumstance.
If youve asked can student loans be included in bankruptcy, make sure youve exhausted every other possibility before pursuing this. By that point, you have already compared debt consolidation versus bankruptcy, for example.
The information weve provided on bankruptcy and student loans is not intended to replace legal advice. For recommendations specific to you, consult with a bankruptcy attorney. Finding a student loan lawyer might be easier than youd think.
Andrew Pentis and Taylor Gordon contributed to this report.
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Can Bankruptcy Get Rid Of Student Loans
Filing bankruptcy can allow you to eliminate debt and get a clean slate financially, either through a structured payment plan or a liquidation of your assets. Many types of debt can be discharged in bankruptcy, but student loans typically aren’t included on that list.
It is possible to include student loan debt in your bankruptcy filing and get it approved by the court if you can prove undue hardship, but that process can be difficult. If you’re struggling financially and are thinking about filing bankruptcy, here’s how to know if your student loans are eligible.
Alternative Options To Bankruptcy
If your total debts are £20,000 or less and you have no valuable assets, such as a home, you may be better off using a Debt Relief Order . This is a less serious version of bankruptcy. Just like bankruptcy, your DRO will stop creditors from asking for payment or taking you to the courts for one year before writing off most of your debts.
Or you may benefit from a different solution, such as an Individual Voluntary Arrangement .
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Can You Discharge Private Student Loans In Bankruptcy
Before 1976, borrowers could discharge private and federal student loans in a bankruptcy, just like credit card debt or medical expenses. But the introduction of the U.S. Bankruptcy Code in 1978 caused a major shift with regard to student debt.
At the time, the intent of Congress was to protect educational loans from bankruptcy abuse. The amended bankruptcy code stated that funds received as an educational benefit would no longer be discharged unless the borrower could demonstrate undue hardship.
Since the ability to discharge private student loans became limited, theres been much debate on the subject. In recent years, there have been a number of major court rulings that made it possible to discharge private student loans. Yet attorneys caution that those rulings still dont necessarily mean that all private student loans are dischargeable in bankruptcy at least not without special circumstances.
It appears as though the courts will eventually answer this question, unless Congress acts first. However, until that happens, the bankruptcy code allows for private student loans to be discharged in bankruptcy only if borrowers can meet the undue hardship standard.
Undue Hardship Test For Student Loan Bankruptcy Discharge In Illinois
The Seventh Circuit Court of Appeals embraces a test known as the Brunner Test, named after the decision of the Second Circuit which originally set forth the test. The Brunner Test applies to all Seventh Circuit cases, so it applies to bankruptcy cases filed in Illinois, Indiana, and Wisconsin.
The Brunner Test requires you to meet three different criteria to qualify for discharge of a student loan:
- You made good faith efforts to repay the loans
- If you are forced to repay the loan, you will not be able to maintain a minimal standard of living for yourself and your dependents, based on your current income and expenses and
- Your current financial situation is likely to continue for a significant part of the repayment period.
To meet the three-part test, the facts in your case must support each individual element of the Brunner Test.
When the bankruptcy court applies the test, the judge is likely to consider eligibility for repayment plans, if you have federal student loans. However, in a case several years ago, the Seventh Circuit upheld a bankruptcy court ruling that a debtor had made a good faith effort to repay her loans even though she had not applied for a federal repayment plan. The case is important because it means that applying for a federal loan repayment plan is not an absolute requirement for meeting the good faith element of the undue hardship test for cases tried in the Seventh Circuit.
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Federal Loans And Hardship
Your student loan holder may choose not to oppose your petition to have your loans discharged in bankruptcy court if it believes your circumstances constitute undue hardship. Even if your loan holder doesn’t, it may still choose not to oppose your petition after evaluating the cost of undue hardship litigation.
For federal loans, the Department of Education allows a loan holder to accept an undue hardship claim if the costs to pursue the litigation exceed one-third of the total amount owed on the loan . Private student lenders are likely to apply similar logic.
Question Whether The Student Loans Are Qualified Education Loans
If a loan is not a qualified education loan, it may be dischargeable in bankruptcy without requiring an undue hardship petition and adversarial proceeding. You should challenge whether the loan satisfies the requirements to be considered a qualified education loan.
Qualified education loans must have been borrowed solely to pay for qualified higher education expenses of an eligible student who was enrolled on at least a half-time basis and seeking a degree, certificate or other recognized education credential at an eligible institution of higher education.
A refinance of a qualified education loan is also considered a qualified education loan.
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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.
Student Loan Bankruptcy Reform Legislation
While a shift in the Department of Educations treatment of undue hardship bankruptcy cases for federal student loan borrowers would be significant, it would take an act of Congress to fundamentally and permanently change the bankruptcy code.
In August, a bipartisan group of senators unveiled the Fresh Start Through Bankruptcy Act. The bill, sponsored by Senator Richard Durbin and Senator John Cornyn , would amend the bankruptcy code to more easily permit federal student loan bankruptcy loan discharges.
Specifically, the bill would eliminate the undue hardship standard for federal student loan borrowers who have been in repayment on their loans for at least the previous 10 years, allowing these borrowers to eliminate their federal student loan debt as easily as any other type of dischargeable consumer debt. No adversary proceeding would be required. The 10-year waiting period would be similar to earlier bankruptcy legal standards for student loans decades ago, before Congress passed legislation establishing the undue hardship standard. Such waiting periods were designed to prevent fraud .
While the Fresh Start Through Bankruptcy Act enjoys bipartisan support, its fate is currently uncertain, as Congress is now focused on other pressing matters, including passage of President Bidens signature infrastructure and social spending bills.
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