Student Loan Bankruptcy: The Process
For many people, student debt is the one debt they can’t seem to overcome no matter what they do. They’ve made payments when their financial situation allowed. Asked for deferments and forbearances when they couldn’t. They’ve applied for loan forgiveness and lower interest rates. And they’ve even asked for options to reduce their outstanding student loan debt via settlement.
Nothing has worked thus far.
It’s at that point that filing student loan bankruptcy becomes an option.
Would Bankruptcy Become An Attractive Way To Get Rid Of Student Loans
Declaring bankruptcy is not an ideal option to deal with student loans because it comes with substantial immediate and long-term consequences. The immediate consequence is that bankruptcy can result in the sale of property to pay off debts. The longer-term consequence is that, depending on the type, Chapter 7 or 13, bankruptcy stays on credit reports for seven to 10 years. The substantial negative mark on credit reports means it will be more difficult to obtain a credit card, auto loan and mortgage. When any form of credit is obtained, the interest rates are likely to be much higher with a bankruptcy on record.
Another solution to a large student loan debt is to enroll in an income-driven repayment plan, such as Revised Pay As You Earn. These plans limit the amount of the monthly payment on federal student loans to a percentage of your discretionary income, which is the difference between your income and 150% of the state poverty guideline, adjusted for family size.
After 20 years of repayment for undergraduate loans , the remaining balance is forgiven. If the new bill becomes law, borrowers in income-driven repayment plans will have a choice. They can either pursue bankruptcy after 10 years and suffer the consequences, or continue paying through loan forgiveness.
Does Bankruptcy Clear Student Loan Debt
Thought it is difficult to get student loan debt discharged, its not impossible. According to a 2011 study, nearly 40 percent of borrowers who do decide to include their student loans in their bankruptcy filing have a portion of their student loan debt eradicated. The study also found that only 0.1 percent of former students who file for bankruptcy choose to include their student loan debt in their bankruptcy proceedings.
If you qualify for and can manage income-based repayment or one of the other options provided by your loan provider, those options may be preferable. But if your debt is overwhelming and your life circumstances dont allow you to continue making payments, theres no shame in including your student loan debt in bankruptcy proceedings.
If youre considering filing for bankruptcy discharge, youll need to determine whether your situation falls under Chapter 7 or Chapter 13 bankruptcy.
The difference is simple. According to USA Today, Chapter 7 filers have virtually no income to pay back any of their debts; Chapter 13 filers might be able to repay at least part of their debt if their student loans were restructured to make them more manageable.
According to recent studies by Jason Iuliano, then a Ph.D. student in Politics at Princeton University, nearly four in ten students that attempted student loan discharge found success. While a forty percent rate means that a majority of people arent successful in their endeavors, its also not inconsequential.
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It Will Impact Your Credit
First, it will have a long-lasting impact on your credit. Depending on the reporting agency and credit score range youre at, your score could drop as much as 200 points. While this gradually improves over time, bankruptcies can stay on your credit report for up to 10 years, affecting your ability to borrow. This is something to keep in mind, especially if youre planning to make a big purchase such as a house or a car in the near future.
Seven Year Rule And Bankruptcy
The most confusing part of whether a student loan is dischargeable is often referred to;as the bankruptcy seven year rule.
The waiting period is the length of time a person needs to be out of school before student loans may be included by bankruptcy.
The test is a simple matter of fact.; When you file for bankruptcy or a consumer proposal has at least 7 years elapsed from your official End of Study date.; The end of study date is the last day you were registered as a student in a post-secondary education facility.; Please dont confuse the last day you attended classes with your end of study date.; You may have decided to stop attending classes in January, but the school kept you registered as a student until the end of May.; To determine your end of study date you should contact the National Student Loan Centre and request this information.; Add 7 years to your end of study date and that is the cut-off for student loans to be automatically dealt with by bankruptcy or a consumer proposal.
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Benefit Of Satisfying 7
|Satisfy the 7-year waiting period form the date of the bankrupts end of their education|
|Filing for personal bankruptcy||If you file for personal bankruptcy more than seven years after the date of the ?end of your education? then you are entitled to an automatic discharge of your outstanding student loan|
|Making a consumer proposal||If you make a consumer proposal more than seven years after the date of the ?end of your education? then you are entitled to a discharge of your outstanding student loan on the date you satisfy your obligations under your consumer proposal|
If you file for personal bankruptcy in circumstances where you do not satisfy the seven-year waiting period, you are not entitled to an automatic discharge of your student loan debt, and your bankruptcy will have no impact on your legal obligations arising from that indebtedness. If you fail to satisfy the 7-year waiting period you will, however, be entitled to have most, if not all, of your other unsecured consumer debt discharged or forgiven as a result of your bankruptcy.
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.
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The Osap Reduction Program
The Repayment Assistance Plan is the OSAP debt reduction program that the Canadian Government offers to students struggling to pay back their loans. This plan applies to the following loans:
- Canada-Ontario Integrated Student Loans
- Canada Student Loans issued before August 1, 2000
- Ontario Student Loans issued before August 1, 2001
- Part-Time Canada Student Loans
Eligible borrowers for the OSAP debt reduction plan will either be exempt from their monthly loan payments for the eligibility period or allowed to make affordable payments.;
Home Mortgage And Other Property Liens
If you have a lien on property, such as a home mortgage, you cannot have the mortgage discharged in bankruptcy.
State laws vary, but you can generally keep your home in bankruptcy if you keep making the payments and if you do not have more equity in the home than you are allowed to keep by state law.
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Bankruptcy May Not Be The Best Option
Bankruptcy is, by its very nature, a long and complicated process. Those with burdensome student loans have certain other options they should first investigate, including:
Income-driven repayment plan: This is a federal student loan repayment option that can lower monthly payments for those who qualify. It is based on specific factors, such as income, family size, loan type, and current location.
Student loan forbearance or deferment: For debtors with federal student loans, this option can temporarily reduce or even suspend payments to help them avoid defaulting on their loans.
Loan forgiveness: Hardship programs through certain private lenders or the government can forgive loans for debtors who are employed by certain government or non-profit organizations. The Public Service Loan Forgiveness is one such program.
Mr. Troutman can provide additional information about these and other programs to his clients with student loans who wish to avoid bankruptcy.
Most Back Taxes And Customs
This generally includes income taxes, Social Security taxes and penalties you owe, or unpaid withholding tax for your employees.
Although most back taxes cannot be discharged in bankruptcy, you may be able to have taxes discharged if they are for a return due 3 or more years ago and you meet certain other qualifications.
If you owe significant back taxes you cannot pay in a reasonable period of time, you may want to ask a tax attorney or other professional about an Offer in Compromise, or OIC, or other alternatives.
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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.
Can You Get A Personal Loan After Bankruptcy It Depends
7 days ago 5 alternatives to unsecured personal loans after bankruptcy · 1. Payday alternative loan · 2. Secured personal loan · 3. 401 loan · 4. Home;
Jun 9, 2021 It is technically possible to get an unsecured personal loan after bankruptcy, but you usually have to wait a bit for your bankruptcy to age and;
Mar 24, 2021 Alternatives to Personal Loans for People in Bankruptcy · Secured Credit Cards · Home Equity Line of Credit · Co-signer loans.
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How Does Bankruptcy Work
When you need to discharge your private student loans, the first thing you need to do is find a reputable bankruptcy attorney. It may not be a mandatory court order to have legal representation, but its your best bet at navigating the very complicated bankruptcy process.
Private student loans are not easily discharged; its a unique process that falls into three categories:
- Federal student loans;
- Private student loans;
- Federal Parent loans These are sometimes called Plus loans.
Sometimes, its easier to qualify for hardship relief for federal student loans than private student loans, but there are options you can explore with your attorney.
Can Student Loans Be Discharged Under Chapter 7
You may be able to have your student loans discharged under Chapter 7 bankruptcy, but the terms under which this could occur can only be decided in bankruptcy court. Chapter 7 bankruptcy is more likely to work in cases of extreme undue hardship where it would be impossible for the applicant to repay their loans under any repayment plan.
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Lawmakers Call For Investigation After Npr Report On Troubled Student Loan Program
Iuliano says the outcome and how much student debt is forgiven, if any, can have a lot to do with what particular judge you end up with and what the rules are in that bankruptcy district.
Some of that is because of the language of the original statute stating that student loan borrowers have to meet a threshold of “undue hardship,” he says. Iuliano says Congress has never defined what that means, so a lot of discretion is left up to the courts and the particular judge you get.
Harrison Wadsworth, a consultant for the Consumer Bankers Association, notes that most student loans are issued by the government. But for loans from private lenders, he says relaxing the bankruptcy rules to make it easier to reduce or eliminate student debt could push up interest rates. “Lenders would have to be careful about making loans and probably have to charge more for them,” Wadsworth says.
Lauren eventually found a lawyer who took her case and charged her about $3,000, doing some of the work pro bono. And going through bankruptcy, she got her debt reduced from about $200,000 to around $100,000, with the bulk of that reduced to a 1% interest rate.
Can You File For Bankruptcy On Student Loans
Can you file for bankruptcy on student loans? It’s difficult, but not impossible to get student loans discharged under Chapter 7 bankruptcy. According to a study published in theAmerican Bankruptcy Law Journalin 2012, 39 percent of debtors from a total of 207 bankruptcy cases won full or partial student loan discharges.
Study author Jason Iuliano of Villanova Universitys School of Law found that 99.9 percent of bankrupt student loan debtorsdo not even try to discharge their student loans.
Heres information on how bankruptcy courts discharge student loan debt.
Subsequent Amendments To Section 523
Congress has periodically amended Section 523 since 1978.54 Each of these amendments has made it more difficult for debtors to discharge student loans in bankruptcy.55 Two of these amendments are particularly important.
Elimination of the Temporal Discharge Option
In its original form, Section 523 gave debtors two separate options for discharging student loans: the debtor could either demonstrate an undue hardship or prove that the loan first became due56 at least five years before the debtor filed for bankruptcy.57 Thus, if a debtor’s student loan was more than five years old, he could potentially discharge that loan in bankruptcy without proving an undue hardship.58
In 1990, Congress extended the five-year period to seven years.59 Thus, between 1990 and 1998, a “debtor seeking to discharge her educational loans in bankruptcy had to wait until seven years after those loans first became due to file if he hoped to discharge those loans without proving that their repayment constituted an undue hardship.”60
Expanding Section 523 to Private Educational Loans
Although most borrowers fund their education using federal student loans, “education loans are also available from such private sources as banks credit unions.”64 Whereas discharging a federal student loan will shift the cost of the debtor’s default to American taxpayers,65 commentators have noted that taxpayers are not directly “footing the bill for private loan defaults.”66
The Brunner Test Involves Three Prongs:
- You must currently be unable to repay the student loans and maintain a minimal standard of living for yourself and your dependents.
- The circumstances that prevent you from repaying the student loans must be likely to continue for most of the repayment term of the loans.
- You must have made a good faith effort to repay the student loans, including using options for financial relief, such as deferments, forbearances and income-driven repayment.
The Totality of Circumstances Test omits the third prong of the Brunner Test and is more flexible.
In addition, the borrower must file the undue hardship petition in an adversarial proceeding, where the lender can challenge the claim of undue hardship.
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Is Refinancing An Option
Deferring loans and forbearance are ultimately short-term solutions. If youre looking for a long-term solution to reduce student loan debt, refinancing could be worth looking into.
Refinancing your student loans means transferring the debt to another lender, with new terms and new interest rates.
Some borrowers may be able to qualify for lower interest than the federal rates depending on your financial standing. But, keep in mind that when federal student loans are refinanced, they lose all eligibility for federal student loan borrower protectionslike the deferment, forbearance, and income-driven repayment plans mentioned above.
If youre looking to refinance, make sure you do your research and see if you can find competitive rates with a lender you trust.
Beware Of Student Loan Scams
Hundreds of private companies target struggling college graduates with the promises of debt relief. What often ends up happening is that these programs put the person in a free federal program but still charges monthly fees. Make sure to keep an eye out for these potential red flags when considering a debt relief company:
- They want payments upfront or monthly fees for their services
- The company guarantees immediate loan forgiveness
- A company representative will pressure you into signing up for the program
- They ask you to share sensitive information, such as your Social Security number
- The companys marketing approach involves social media posts and search engine ads, instead of a building a long-standing reputation
There are more than 100 companies in the United States that appear to be scams. If you do come across one of these bad actors, make sure to report it to the CFPB or the Federal Trade Commission. These agencies use customer complaints to target potentially deceitful companies, and return lost money to the individuals who need it most.
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