How To Demonstrate Undue Hardship
“Bankruptcy discharge of student loans is very rare, but not completely impossible,” Kantrowitz adds.
According to Kantrowitz, these are some circumstances in which borrowers have been able to demonstrate “undue hardship:”
- The borrower is disabled, but the private student loan does not offer a disability discharge.
- The borrower has a disabled dependent, which affects the borrower’s ability to work full time while caring for the dependent, or where the cost of caring for the dependent yields a higher minimal standard of living.
- The borrower has very low income and limited prospects for increasing income.
- Alimony and child support obligations reduce the borrower’s net income, affecting the ability to maintain a minimal standard of living while repaying the student loan debt.
- The borrower has a high cost of living due to where they are living , which affects the minimal standard of living threshold.
- The college degree was worthless and does not enable the borrower to earn enough to repay the debt.
- The amount of debt is excessive compared with the borrower’s income, making it difficult to repay the debt. For example, a grandparent cosigned a private student loan for a grandchild and is now retired on fixed income.
What Happens To Student Loans In Chapter 13 Bankruptcy
Chapter 13 bankruptcy is a reorganization where youre required to repay part of your debt, likely over three to five years. Some of your remaining debts may be discharged at the end, including student loans.
|Chapter 13 in the news|
|In August 2020, a bankruptcy court affirmed the cancellation of $200,000 in education debt for a Colorado couple. The potentially landmark ruling was the final result of a Chapter 13 filing.|
Heres what happens to student loans under Chapter 13 bankruptcy:
Lenders stop hounding you. Upon filing your Chapter 13 bankruptcy petition, an automatic stay is granted. This prohibits most creditors including student loan servicers from trying to collect debts. This protection typically continues through your repayment period.
Student loans dont take top priority. Student loans in Chapter 13 bankruptcy are considered nonpriority unsecured debt. This means you arent required to pay the full amount of your student loans through the Chapter 13 repayment plan.
Your monthly payment may change. The amount you end up paying toward your student loans in Chapter 13 bankruptcy depends on your repayment plan. Your student loans receive a pro rata share, which will likely represent a dollar amount less than your regular monthly student loan payment. In some cases, your student loan debt might be discharged .
Find Out How Bankruptcy Affects Paying For College
My daughter will be starting college in the fall . Thefull cost for each year is approximately $50,000. She received ascholarship for $35,000 and she has enough saved for books ,leaving her needing $14,000. When we filled out the FAFSA it said herfamily contribution would be too high. Unfortunately my husband and Ifiled for bankruptcy in 2010. This will appear on our credit reports
No essay required. Students and parents are eligible to win.
through 2020. We can’t cosign for her even if we wanted to. We haveasked any and all family members but no one wants to or can cosign.Are there any loans out there that do not need a cosigner? She workspart time at a retail company and makes approximately $8,400 a year.We barely make enough to keep a roof over our heads and cannot helpher financially.
Easy to Enter, No Essay Needed
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Alternatives To Bankruptcy For Student Loans
Since bankruptcy can be an expensive and cumbersome process, most experts see it as a last resort for borrowers. Consider bankruptcy after youve exhausted all other options, like debt consolidation, credit counseling and negotiating with creditors for a lower payment or interest rate.
If youre balancing student loan payments with other expensive, dischargeable debts like credit cards and medical bills, then bankruptcy may be able to provide relief. But if student loans are your only concern, consider these alternatives.
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.
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Take Your First Step Towards A Debt Free Life
If you are overwhelmed by debt and live in the Toronto area, call us at 416-498-9200 to book a FREE, confidential appointment. We will review your financial situation in detail and discuss all of your options with you. Alternatively, you can fill out the form below and our team will reach out to you.
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Can You Get Approved For A Personal Loan After Bankruptcy
It depends. But remember that depending on the type of bankruptcy you file, bankruptcy can negatively impact your credit score for years .
Bankruptcy can put you at a disadvantage when it comes to qualifying for new credit cards or loans, and some lenders dont offer personal loans at all to people with a bankruptcy on their records. Even if you get approved, it can be difficult to get loans with favorable terms or low interest rates.
Lenders who check your credit report will learn about a Chapter 7 bankruptcy for up to 10 years after the filing, while a Chapter 13 bankruptcy will stay on your credit report for up to seven years.
Still, filing for bankruptcy doesnt mean you cant ever get approved for a loan. Even though your credit score might take a dip after filing for bankruptcy, it may improve shortly thereafter, especially if you stay up to date on your repayment plan or your debts are discharged.
One study found that people in Chapter 13 bankruptcy protection saw their credit scores increase by 17 points over the first five years after filing.
You may even be able to help your credit score during bankruptcy by making the required payments on any outstanding debts, whether or not you have a repayment plan. The faster you can take steps to improve your credit, the sooner you can feel like your financial life is back on track.
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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.
Talk To A Bankruptcy Lawyer
Need professional help? Start here.
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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.
Where Can You Get A Loan After Bankruptcy
Bank loans are likely unattainable after a bankruptcy. If you want to secure a loan, you are most likely going to have to rely on alternative lenders.
Alternative lenders are private, and not associated with traditional banks. They can either be a business, an independent person lending, or a fintech company offering lending services online. While banks place a lot of emphasis on your credit score in assessing your reliability, alternative lenders balance their approval on other factors, including income, job stability, capital, and debt to income ratio when deciding whether or not they want to lend to you.
Keep in mind, however, that alternative lenders offer loans that have higher interest rates to offset the risk of a borrower with unfavourable credit.
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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 bankruptcy even 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.
Think Of Insolvency Waiting Periods As A Clock With A Start Date And An End Date
It is helpful to think of these waiting periods as a clock with a start date and an end date. The end date is straightforward: its the date that your Licensed Insolvency Trustee receives a Certificate of Appointment from the Court typically within one or two days of your filing for personal bankruptcy or making a consumer proposal.
The $64,000 question is: when is the start date of the 7-year and 5-year waiting periods?
There are a significant number of Canadians who waited several years before applying for a bankruptcy or making a consumer proposal who subsequently found out that they failed to have their student loan forgiven because they miscalculated the start date on the running of the 7-year waiting period under federal insolvency lawby a period of a few days, weeks or months.
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Defaulting On Student Loans
How many parents have student loans?
The Department of Education said that 3.3 million borrowers had $74.5 billion in Parent Plus loans in 2016 to pay for their childrens education. Another study by the University of Southern California said the average parent borrows $21,000, but that parents with incomes higher than $120,000 borrow an average of $30,000.
The Consumer Financial Protection bureau said that 2.8 million people 60-and-over were paying on student loans in 2017. That is four times the number who borrowed in 2007. Even worse, the Government Accounting Office says that 37% of student loan borrowers age-65 and over are in default.
If youre considering bankruptcy, your loans are probably already in default, meaning you havent made a payment in more than 270 days . This is more common than you may think. The national default level on student loan repayment is approximately 10%, meaning that 4.4 million borrowers are in default on Americas $1.4 trillion student loan problem.
The Department of Education said that the default rate was falling in 2016, but that is misleading according to many experts because nearly 6.5 million borrowers were in deferment or forbearance, two forms of delay before a borrower goes into default. Austin said his research indicates that 40% of student loan borrowers are either delinquent or in default .
Will I Lose Student Loan Eligibility If I File For Bankruptcy
A college education is a massive expense. According to the College Board, the average cost of tuition, fees, room, and board from 2014 to 2015 was nearly $42,500 for a private four-year college. Four-year public schools didnt fare much better, with an average price tag of about $33,000 for out-of-state and close to $20,000 for in-state. When faced with such a staggering bill, the overwhelming majority of students and/or parents will have to take out a loan. But what if you have a bankruptcy in your past? Will you lose student loan eligibility? Our Allentown bankruptcy lawyers explain some of the factors students and parents should consider.
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.
What To Know About Bankruptcy
There are two types of bankruptcy: Chapter 7the most commonand Chapter 13. In both cases, if youre successful in filing, you wont have to repay certain debts, and wage garnishment and other debt collection activities will end.
Chapter 13 bankruptcy gives filers who have a consistent income a payment plan to pay off debts within three to five years. The remaining debt is discharged after that time. Under Chapter 7 bankruptcy, theres no payment plan, and discharge can happen sooner, but your eligible assets will be sold to pay off your debts. After that, any remaining debt will be discharged.
In both cases, theres a downside: The bankruptcy will appear on your credit report for 10 years if you file for Chapter 7 and seven years if you file for Chapter 13. And unless you choose Chapter 13, you might also lose the collateral you put up to back secured debt, like a mortgage, that hasnt been paid and has a lienor a legal claimagainst it.
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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.