Can A Student Loan Be Discharged In Chapter 7 Bankruptcy
The topic of student loans and student debt is now at the forefront of the conversation about overall consumer debt in America. Student loan debt is now larger than credit card debt with a collective $1.4 trillion burden of debt and student loan delinquency rate is now 11.2 percent . It is no wonder the question of whether or not student loans can be included in a Chapter 7 bankruptcy comes up all the time.
Private student loans are generally non-dischargeable in a Chapter 7 bankruptcy. That being said, on February 6, 2013, U.S. Congressmen Steve Cohen introduced H.R. 532: Private Student Loan Bankruptcy Fairness Act of 2013, which proposed amending the U.S. Bankruptcy Code to modify the ability to discharge certain debts for educational payments and loans. This particular bill died in Congress but Congressman Cohen re-introduced the same concept in H.R. 2527: Private Student Loan Bankruptcy Fairness Act of 2017. This bill is currently in the House under debate.
Can Parent Plus Loans Be Discharged In Bankruptcy
Parent PLUS Loans can be discharged in both Chapter 7 bankruptcy and Chapter 13 bankruptcy like other types of federal and private student loans. But you first have to file a lawsuit in your bankruptcy case called an adversary proceeding. In the adversary complaint, you’ll have to show the bankruptcy judge that repaying the loans would cause an undue hardship to you and your dependents. Meeting the undue hardship standard for student loan discharge is challenging.
Most bankruptcy courts use the Brunner Test to determine if you’ve met the standard. The Brunner Test reviews three criteria:
You can read more about the student loan bankruptcy process here.
What Is Student Loan Bankruptcy
You may have heard that student loans cannot be discharged in bankruptcy. That statement oversimplifies the truth. You actually can get student loans discharged in some cases, but the bar is higher, and the process is more burdensome than it is for other types of debt.
Filing for bankruptcy to discharge student loans may get easier, though, if a recently introduced bipartisan bill is passed. The Fresh Start Through Bankruptcy Act of 2021, by Senators Dick Durbin and John Cornyn , would restore the ability for struggling borrowers with federal student loans to seek a bankruptcy discharge for their loans 10 years after the first loan payment comes due.
It would also make it possible to retain the existing undue hardship discharge option for private student loans and for federal student loans that have been due for fewer than 10 years.
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Likelihood Of Discharging Student Loans
Why Is It So Difficult To Discharge Student Loans?
In 1976, Congress prohibited federally guaranteed student loans from being discharged in bankruptcy except under conditions of undue hardship. This was in response to largely unfounded fears of too many student debtors looking for an easy way out of their obligations.
This put student loan debt in the same category as financial obligations like child support, alimony and criminal fines.
In 2005, Congress added private student loans to the list of debts that cannot be discharged.
In most bankruptcy cases, consumers dont even attempt to have student loans discharged. Instead, their lawyers focus on other issues such as .
Austin said that less than 1% of bankruptcy filings include student loans, even when there is a compelling case. He cited a situation in which a single mother on a teachers salary and battling cancer didnt bother filing for bankruptcy, despite more than $150,000 in student loan debt.
However, in most cases, the legal hurdles that have to be overcome are so daunting that most lawyers advise their clients not to seek a discharge for student loan debt in their bankruptcy filing. Also, there are now several income-driven repayment plans such as Pay As Your Earn , Repay As You Earn , Income Contingent Repayment and Income Based Repayment that most borrowers should be able to find a program they can afford.
Surprisingly, about 40% of the cases that are filed, actually are successful.
Process For Discharging Student Loans
Student loan bankruptcy is usually part of a Chapter 7 or Chapter 13 bankruptcy filing. The Chapter 7 bankruptcy is an attempt to have all unsecured debt discharged. The Chapter 13 bankruptcy is an attempt to have the debt reorganized in payments the borrower can afford.
Student loan bankruptcy laws are tilted heavily in favor of the lender. There are strict guidelines as to whether your student loans can be erased and they apply to any loan specifically granted for education expenses, including both private and public student loans. They apply to student borrowers as well as parents borrowing loans to pay for their childrens education.
If you want to pursue bankruptcy for you student loan debt, the first step would be to find a reputable bankruptcy attorney. One of the reasons so few student loan bankruptcy cases are successful is because more than 50% are filed by the borrower, who has no legal training or understanding of the court system. According to Austin, probably another 40% or more are pro bono cases, meaning the lawyer is donating his time for free.
Either way, the odds are stacked against the borrower right from the start.
To succeed, you must be able to prove that your student loans impose an undue hardship on you and your dependents. The term undue hardship has endless interpretations, but most of them have favored creditors.
Courts use three criteria for verifying undue hardship:
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Can I Get A Student Loan While In Chapter 13 Bankruptcy
People tend to use the time while working through bankruptcy to set new goals for themselves. One way that some people plan to better themselves and build a more stable financial future is through earning a degree. But how can you afford college tuition when youre sticking to a bankruptcy repayment plan? Can you take out a student loan to make this possible?
Your goals for a brighter financial future are important. Bankruptcy judges and trustees dont want to make your path towards improvement more difficult. Yet, getting loans while working through bankruptcy isnt a clear-cut process. Learn more about the possibility of student loans during bankruptcy, if filing for Chapter 13 will make it harder to borrow money in the future, and how student debt can be discharged through bankruptcy.
File For An Adversary Proceeding
Whether you hire a lawyer or go it alone, youll need to file for an adversary proceeding, which is a hearing to determine the possibility of discharging your student loan debt. Youll have a hearing in bankruptcy court and your creditors are required to be present. At that hearing, youll need to provide evidence that you qualify for undue hardship standards.
This is part of the process that is unique to bankruptcy and student loans. Note that you cant proceed with a student loan bankruptcy without this step.
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Other Financial Relief Options For Parent Plus Loans
While the processes outlined above are technically the only ways to earn forgiveness or a discharge for a Parent PLUS Loan, there are still several other ways to help reduce the financial burden of Parent PLUS debt.
These programs wont let you eliminate the outstanding balance of your loan, but they will help save you money by doing things like decreasing your monthly payments, pausing monthly payments, and basically making your debt more affordable, at least in the short-term.
The most popular ways to reduce your monthly payments and near-term debt burden for Parent PLUS Loans are:
- Student Loan Refinancing
- Changing Your Student Loan Repayment Plan
Havent There Been Cases Where People Still Got Rid Of Their Students Loans Through Bankruptcy
Absolutely. Though difficult, it is still possible to have student loans discharged through bankruptcy by meeting the undue hardship requirement. A 2011 study found that only 1 in 1,000 student loan borrowers who declared bankruptcyeven tried to have their student loans discharged. However, those that did succeeded at a rate of 40%.
Section 523 of the Bankruptcy Code does not set out a specific test to determine what qualifies as undue hardship. The federal courts are split on what the appropriate standard should be for discharging student loan debt. The Second Circuit case, Brunner v. New York State Higher Education Services Corporation, established three requirements that determine whether undue hardship applies.
First, the borrower must demonstrate that if forced to repay the student loans, they will be unable to meet a minimal standard of living based on income and bills.
Second, the borrower must be unable to repay for a significant portion of the repayment period.
Third, they must have made good-faith efforts to repay the student loan.
If a bankruptcy court agrees that a borrower meets these three requirements, the court can discharge the student loan debt.
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Have You Considered Other Repayment And Forgiveness Options
Can you file bankruptcy on student loans? Maybe. Should you? That depends on your personal situation.
Filing bankruptcy on student loans is a complicated, intrusive and extensive process. In fact, Fuller advised not doing it at all if you can. It should be a last resort, he said.
There are many alternative solutions to filing bankruptcy on student loans. For example, federal loans come with options such as income-driven repayment plans and deferment or forbearance. These programs could provide relief without the extreme step of bankruptcy.
You also have the option to apply for forgiveness, either through an income-driven repayment plan or Public Service Loan Forgiveness . PSLF is available to those who work for certain public service organizations, such as government agencies or nonprofits.
And if you have private student loans, talk to your lender. They might have a hardship program for student loans that you didnt know about. Fuller suggested sending to your private loan servicer a letter via certified mail outlining your financial hardships, your income and how much youre able to pay. Your servicer may respond with a repayment plan that provides some relief. After all, you dont lose anything by asking.
Before filing bankruptcy on student loans and trying to fight against a system that makes it difficult to discharge your debt, be sure to research your other debt repayment options for student debt relief.
Andrew Pentis and Alli Romano contributed to this report.
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:
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Parent Plus Loan: How The Government Is Saddling Parents With Loans They Can’t Afford
More than a decade after Aurora Almendral first set foot on her dream college campus, she and her mother still shoulder the cost of that choice.
Almendral had been accepted to New York University in 1998, but even after adding up scholarships, grants, and the max she could take out in federal student loans, the private university among nation’s costliest still seemed out of reach. One program filled the gap: Aurora’s mother, Gemma Nemenzo, was eligible for a different federal loan meant to help parents finance their children’s college costs. Despite her mother’s modest income at the time about $25,000 a year as a freelance writer, she estimates the government quickly approved her for the loan. There was a simple credit check, but no check of income or whether Nemenzo, a single mom, could afford to repay the loans.
Nemenzo took out $17,000 in federal parent loans for the first two years her daughter attended NYU. But the burden soon became too much. With financial strains mounting, Almendral who had promised to repay the loans herself withdrew after her sophomore year. She later finished her degree at the far less expensive Hunter College, part of the public City University of New York, and went on to earn a Fulbright scholarship.
But according to an outside analysis of federal survey data, many low-income borrowers appear to be overburdening themselves.
Colleges’ Tricky Role
The Middle Class Struggles to Repay
Recent Changes to Parent Plus, and Uncertain Results
Does A Parents Bankruptcy Affect Eligibility For Student Financial Aid
Bankruptcy is a complicated issue that affects many areas of ones life, but in general, filing for bankruptcy doesnt interfere with eligibility to receive federal aid.
It can, however, affect eligibility for some student loans and loan programs, but it might not be as bad as you think.
A green light for financial aid and federal loans
A parents bankruptcy has no direct impact on their childs eligibility for federal student aid. Even if their parents have a bankruptcy , a child remains eligible for federal student loans. An example is the Stafford loan which does not depend on the borrowers credit history in any way.
The Bankruptcy Reform Act of 1994 amended the US Bankruptcy Code to make sure government student grants and loans couldnt be denied based solely on the students or borrowers filing of a bankruptcy. The only exception is the Federal PLUS loan.
PLUS loans not so much
Direct PLUS loans are federal loans that parents of dependent undergrad students can use to help pay for college. The U.S. Department of Education is the lender, and they conduct credit checks, so those with an adverse credit history are not eligible.
Adverse credit history can be defined as having had a bankruptcy discharge, foreclosure, repossession, tax lien, wage garnishment or default determination in the last 5 years, or current delinquency on any debt of 90 days or more. Parents remain ineligible for 5 years from the date of the bankruptcy discharge.
The good news
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Explain The Proposed Law To Allow Bankruptcy For Student Loans
If enacted, the bipartisan FRESH START through Bankruptcy Act would change the current law to remove the lifetime ban on student loan discharge in bankruptcy and replace it with a 10-year ban.
Under the proposed law, if borrowers can show that paying their student loans caused undue hardship during the first 10 years, then they can get it discharged after that 10-year period is over without having to prove that it would be an undue hardship from that point forward.
This change would only apply to federal student loans, not private student loans. Any discharge of private student loans, regardless of the repayment timeline, would still require proving undue hardship.
To help shoulder some of the financial cost to the federal government of this proposed change, the bill also includes an accountability measure for colleges and universities. The schools would have to reimburse the government for a portion of the discharged student loan amount depending on the cohort default rate and repayment rate of the institution at the time the first loan payment comes due.
Bankruptcy And Parent Plus Loans
Many parents take out Parent Plus Loans on behalf of dependent undergraduate students to bridge the gap between federal student loans and remaining college tuition. With college education costs at an all-time high, many parents wind up taking on substantial student loan debt to help their children get through school. Today, 3. 6 million parent borrowers owe over $96 billion in Parent Plus Loans and, unfortunately, many are struggling to pay them back.
Of course, parents want their kids to succeed, but what seemed manageable early on can sometimes create a financial strain for parents as sources of income become more limited due to age or other unforeseen factors such as a job loss or increased expenses of their own. Shouldering student loan debt over long repayment periods can only make a difficult financial situation worse leaving many parents wondering what they can do to tackle student loan debt.
Remedies to Consider When Tackling Parent Student Loan Debt
Transferring a Parent Plus Loan to a child is an option parents may want to consider. To absolve a parents responsibility for a Parent Plus Loan, borrowers can transfer PP loans back to their child following graduation about the time a child acquires gainful employment and is able to start making payments on the loan. Even if parents are intent on continuing to help a child out, shifting the loan back to the child might result in lower interest rates and lower payments.
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