Student Loans And Bankruptcy: How It Currently Works
While it is far from impossible to get student loan debt cancelled through bankruptcy under current law, it is not easy. To be successful, most student loan borrowers have to show that they have an undue hardship, which is a challenging legal standard. The bankruptcy code does not define in detail what it really means to have an undue hardship, so bankruptcy courts have had to step in to create rules and tests . In many states, student loan borrowers have to show that there is a certainty of hopelessness to their situation.
The process of even trying to prove undue hardship also presents challenges. A student loan borrower seeking to discharge their loans in bankruptcy court must initiate an adversary proceeding essentially, they must sue their student loan lenders in bankruptcy court to prove that they meet the standard. In most cases, student loan lenders including the U.S. Department of Education and U.S. Department of Justice will oppose the borrower. Adversary proceedings can be a long, exhausting, and if the borrower hires private legal counsel expensive, which can itself cut against their undue hardship argument. Meanwhile, lenders have significantly more resources than borrowers do, providing them with an advantage in court. As a result, many borrowers dont even bother trying to get their student loans discharged in bankruptcy.
Other Options If You Cannot Discharge Your Debt
If your student loan is not considered an undue hardship and cannot be discharged through a Chapter 7 or Chapter 13 bankruptcy, you may have other options.
For example, you may be able to use another payment plan that offers more affordable payment options. You may qualify for deferment or forbearance. You may be able to restructure your payment plan to make it more manageable.
The Brunner Undue Hardship Test
First, the debtor will need to file a separate law suit known as an adversary proceeding. The point of this proceeding is to show that undue hardship is preventing him or her from paying back student loans.
The court will hear evidence to determine if the debtor will be able to discharge all or part of his or her student loan debt. The judge will have to determine paying the debts will be an undue hardship on the debtor.
The test that usually accompanies this determination is called the Brunner Test:
- Impoverishment: The debtor will need to show that he or she cannot maintain a minimum standard of living if he or she is required to keep making student loan payments
- Situation persistence: Further, the debtor will need to show that his or her financial situation will not change and is likely to continue through the student loan repayment period and
- Good faith effort: The debtor will need to also show that he or she has made a good faith effort to repay back the balance of his or her student loans.
All three of these business requirements must be met before the bankruptcy court will determine that the debtor deserves to have some or all of his or her student loan debt discharged.
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Calculating When The 7
If you are contemplating filing for personal bankruptcy or making a consumer proposal in the hopes of discharging your student loan debt, you should seek the help of a Licensed Insolvency Trustee to ensure that you have satisfied the 7-year waiting period.
To be prudent, if your goal is to have your student loans discharged, you should calculate the start date on the end of your education as the latter of
- The date you actually ceased attending school, or
- the last day of your exams for your final semester
You might want to add 30 to 90 days out of an abundance of caution.
File For An Adversary Proceeding
Once youve officially filed for bankruptcy, youll need to file an adversary proceeding for your federal student loans. The adversary proceeding states that your student loan debt causes undue hardship, said Matthew Alden, a bankruptcy and debt relief attorney at Ohio-based Luftman, Heck & Associates LLP, in an email to The Balance. Once its filed, youll have to provide evidence of the hardship in court. The same appears to apply to those seeking to discharge private student loan debt, although they would need to prove that their loans did not constitute an educational benefit, as per the recent Second Circuit ruling.
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Student Loan Debt And Chapter 7 Bankruptcy
Chapter 7 bankruptcy is also referred to as liquidation bankruptcy. This means that upon the filing of the Chapter 7 bankruptcy petition, the debtors current claims against him or her are immediately halted under the automatic stay.
The debtor gives a list of all creditor information, each creditor is given a chance to make a claim on the debt and why it should not be liquidated.
Then upon the close of the case, the debts that are not associated with another asset or do not qualify for liquidation are thus liquidated. If student loans are included in these debts that are allowed to be liquidated, the debtor will not be responsible for them further.
What Is The First Step In Discharging Student Loan Debt In Bankruptcy
To start the process of discharging your student loans through bankruptcy, you must first file for bankruptcy. The good news for you is that our bankruptcy lawyers have years of experience in bankruptcy and can skillfully guide you through the process of choosing the right path for you, which will generally be either a Chapter 7 or Chapter 13 bankruptcy. You can discharge student loans in bankruptcy through any bankruptcy chapter so we will advise you on which chapter is best for you.
It is also important to note that if you have already filed and completed a bankruptcy, you may not have to file another bankruptcy. In these circumstances, our student loan lawyers can file a motion to re-open your bankruptcy and then go through the steps to challenge your student debt. Dont worry though, this doesnt have any effect on your credit.
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Can Student Loans Be Discharged In Bankruptcy Yes It Is Possible But
The consequences of defaulting on student loans are significant, resulting in calls from collection agencies, damaged credit, possible wage garnishment, and forfeiture of tax refunds.
But if your credit is already poor because your student loans have become unmanageable and youre unable to make payments or youve spent years making payments on interest with little effect on your balance, attempting to eliminate them through bankruptcy may be worth considering.
Make no mistake, however, discharging student loans through bankruptcy is difficult.
That was not always the case. Before 1976, debtors could discharge student loan debt like most other types of unsecured consumer debt, such as credit card balances and medical bills.
That ended in 1976 when Congress amended the Higher Education Act of 1965, making student loans non-dischargeable in bankruptcy unless a debtor could prove that not discharging their student loans would cause undue hardship, a notoriously high legal bar that is difficult to clear.
So, while you may be able to get your student loans discharged under certain circumstances, the process is more burdensome and uncertain than it is for other types of debt.
The first step in getting your student loans discharged in bankruptcy is to file a Chapter 7 or Chapter 13 bankruptcy.
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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The Totality Of Circumstances Test
A few states use the “totality of the circumstances” test. It might seem that this is an easier standard to meet because it doesn’t consider whether youve made a good-faith effort to repay your loans, such as consistent attempts to obtain employment, maximize income, and minimize expenses. However, the totality of the circumstances test also includes an any other relevant facts and circumstances component that could be broadly interpreted.
Under either standard, the bar to clear is high, especially for federal student loans, for which the government specifically states that the burden of proof is on the debtor to prove undue hardship.
How To File For Bankruptcy
Filing for bankruptcy is a legal process that either reduces, restructures or eliminates your debts. Whether you get that opportunity is up to the bankruptcy court. You can file for bankruptcy on your own, or you can find a bankruptcy lawyer, which most experts regard as the prudent avenue to pursue.
Bankruptcy costs include attorney fees and filing fees. If you file on your own, you will still be responsible for filing fees. If you cant afford to hire an attorney, you may have options for free legal services. If you need help finding a lawyer or locating free legal services, check with the American Bar Association for resources and information.
Before you file, you must educate yourself on what happens when you file for bankruptcy. Its not simply a matter of telling a judge Im broke! and throwing yourself at the mercy of the court. There is a process a sometimes confusing, sometimes complicated process that individuals and businesses must follow.
The steps are:
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Big Changes To Student Loan Bankruptcy Rules May Be Coming But Questions Remain
It may soon get easier for some student loan borrowers to discharge their debt through bankruptcy.
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It may soon get easier for some borrowers to discharge their student loan debt through bankruptcy. But many questions remain about what these changes may look like, and how sweeping any reforms will ultimately be.
What Happens If Your Student Loans Arent Discharged
If, as in most cases, your loans are not discharged in bankruptcy, heres what happens.
- Chapter 7 bankruptcy. In Chapter 7 bankruptcy, if payment of your loans is not an undue hardship, youll still owe them when your bankruptcy case is over.
- Chapter 13 bankruptcy. If you cant discharge your student loans, Chapter 13 bankruptcy provides some other ways that can help. For example, youll likely be able to pay a reduced amount during your Chapter 13 planalthough youll be on the hook for whatever amount is left after your repayment period ends.
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Can Student Loans Ever Be Discharged
College is getting more and more expenses these days, and students are graduating with over six figures in student loan debt. That amount of debt can be crushing to the debtor, making it impossible for him or her to breathe.
Student loans can come in two different types of categories: federal or private. These categories involve two different sets of creditors going after the debtor for repayment.
What Do You Get From Proving Undue Hardship
As you can see, proving undue hardship is not that easy. However, if you can do it, filing for bankruptcy will completely cancel your student loan. You do get a few other benefits from filing for bankruptcy.
For instance, you are completely protected from collection actions on your student loan and any other debts you have. Bear in mind that this protection doesnt last indefinitely. You will remain protected until your bankruptcy claim is resolved. Once the creditor gets official permission from the court to start collecting again, you will have to manage your payments.
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What Is A Trustee And What Is A Trustees Role
A Licensed Insolvency Trustee is the only professional who can administer a bankruptcy in Canada.
Licensed Insolvency Trustees are federally licensed and regulated by the Office of The Superintendent of Bankruptcy. Trustee fees are regulated under the Bankruptcy and Insolvency Act and are moderate, so the cost of bankruptcy is tends to be reasonable.
So What Really Constitutes Undue Hardship
Those cases where borrowers have succeeded in having their student loans discharged are insightful. Specifically, a court might agree that repaying your loans would be an undue hardship if you cant maintain a minimal standard of living for yourself and any dependents, if the hardship will continue throughout the loans repayment period, and if youve sincerely tried to repay your loans before filing bankruptcy.
What does a court consider a minimal standard of living? Again, case law and some common sense can be a guide. It might mean:
- Your income has been below the federal poverty level for several years and doesnt show signs of improving.
- Youre on public assistance or dependent on a family member.
- You have a debilitating mental or physical illness or permanent injury.
- You have a child with a serious illness who requires round-the-clock care.
- Divorce reduced your family income with no hope of it returning to its previous level.
- Disability checks are your only source of income.
- You depend on public assistance to support your children.
- You support a spouse who was seriously and permanently injured in a car accident or who has developed a total disability.
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How To Pursue Student Loan Discharge In Bankruptcy Proceedings
Meeting the standard of undue hardship is incredibly difficult, so its worth speaking with a bankruptcy lawyer to see if its even a possibility in your unique situation. However, you may be able to claim it under certain circumstances, such as living with a permanent disability or terminal illness.
Even if you think you meet the standard of undue hardship, its important to understand that discharging student loans involves additional work on top of the standard bankruptcy proceeding.
Its not as simple as filing for bankruptcy, Kantrowitz says. Its an adversary proceeding within a bankruptcy proceeding. That means the lender gets to defend against bankruptcy discharge.
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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Can Your Debts Be Erased In Student Loan Bankruptcy Yes Heres How
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Why Cant People Get Rid Of Student Loans Through Bankruptcy Now
Although not impossible, discharging student loans in bankruptcy is difficult. Due to a 1976 law, student loans are not treated during bankruptcy proceedings like other forms of debt, such as credit card debt or auto loans. This policy stems from a federal commission on bankruptcy laws, which heard testimony that claimed the easy discharge of educational loans in bankruptcy could undermine federal student loan programs. Congress was concerned that students might borrow thousands of dollars from the federal government, graduate, declare bankruptcy to have their student loans discharged and never repay their educational debt.
In an extension of the Higher Education Act of 1965, Congress passed the 1976 law, which made borrowers wait five years after the first student loan payment was due before they could have the loan discharged through bankruptcy. Congress created an exception that allowed for discharge within that five-year period if the loan caused undue hardship.
Congress extended the five-year bankruptcy ban to seven years in 1990. Then Congress extended it to the borrowers lifetime in 1998.
Currently the undue hardship exemption is the only way to have student loans discharged in bankruptcy that is a much higher threshold than many other common forms of debt. This higher threshold includes both federal student loans and, since 2005, most forms of private student loans.
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