How Much You Need To Repay
Verify your loan or line of credit contract to figure out the following:
- the total amount you owe
- the interest rate that will be applied to your debt
- how youll repay your debt
- how much youll pay
- how long it will take to pay back your debt
Contact the organization that provided your student loan or line of credit if you dont have the information listed above.
What Bankruptcy Can’t Do
Bankruptcy doesn’t cure all debt problems. Here’s what it can’t do for you.
Prevent a secured creditor from foreclosing or repossessing property you can’t afford. A bankruptcy discharge eliminates debts, but it doesn’t eliminate liens. A lien allows the lender to take property, sell it at auction, and apply the proceeds to a loan balance. The lien stays on the property until the debt gets paid. If you have a secured debta debt where the creditor has a lien on your propertybankruptcy can eliminate your obligation to pay the debt. However, it won’t take the lien off the propertythe creditor can still recover the collateral. For example, if you file for Chapter 7, you can wipe out a home mortgage. But the lender’s lien will remain on the home. As long as the mortgage remains unpaid, the lender can exercise its lien rights to foreclose on the house once the automatic stay lifts.
Eliminate child support and alimony obligations. Child support and alimony obligations survive bankruptcy, so you’ll continue to owe these debts in full, just as if you had never filed for bankruptcy. And if you use Chapter 13, you’ll have to pay these debts in full through your plan.
Eliminate most tax debts. Eliminating tax debt in bankruptcy isn’t easy, but it’s sometimes possible for older unpaid tax debts. Learn what’s needed to eliminate tax debts in bankruptcy.
Eliminate other nondischargeable debts. The following debts aren’t dischargeable under either chapter:
Stop A Foreclosure Repossession Or Eviction
The automatic stay will stop these actions as long as they’re still pending. Once complete, bankruptcy won’t help.
- Evictions. An eviction that’s still in the litigation process will come to a halt after a bankruptcy filing. But the stay will likely be temporary. Keep in mind that if your landlord already has an eviction judgment against you, bankruptcy won’t help in the majority of states. Learn more about evictions and the automatic stay.
- Foreclosure and repossession. Although the automatic stay will stop a foreclosure or repossession, filing for Chapter 7 won’t help you keep the property. If you can’t bring the account current, you’ll lose the house or car once the stay lifts. By contrast, Chapter 13 has a mechanism that will allow you to catch up on past payments so you can keep the asset. Find out more about bankruptcy’s automatic stay and foreclosure and car repossession and bankruptcy.
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Private Loan Modification Or Settlement
Your options to reduce private loan payments or get out of default vary greatly based on the lender. Communicate directly with your private lender or servicer to explore loan modification programs if you cant afford your payments long-term.
If youre behind on your loans, you could consider reaching a settlement agreement with the lender or collection agency. At which point, you would pay a lump sum settlement thats less than your total outstanding balance. But you may have to pay taxes on this amount, and it could be unaffordable.
If you can, consult a tax professional or lawyer with student loan expertise if youre in communication with a collection agency about a settlement.
Student Loans Are Difficult To Discharge
You can usually discharge unsecured debts, like credit card debt, medical bills, and personal, loans, in bankruptcy. Student loans are also unsecured debts, but bankruptcy treats them differently. Unlike most other unsecured debts, you cannot automatically discharge them in Chapter 7 or Chapter 13 bankruptcy.
To discharge student loans, you must to file a separate lawsuit in your bankruptcy case, called an adversary proceeding. To win that proceeding, you must show the court that paying your student loans will cause you or your dependents a hardship. The standard for proving a hardship differs depending on your jurisdiction but is always a steep obstacle to overcome.
To learn more about what constitutes a hardship, read Student Loan Debt in Bankruptcy.
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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.
Can Your Debts Be Erased In Student Loan Bankruptcy Yes Heres How
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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.
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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Student Loan Discharge In Bankruptcy
It is possible to discharge student loans in bankruptcy although it is not easy. The procedure is that an adversary proceeding must be filed in the bankruptcy court to prove that the undue hardship standard has been met.
In addition to discharge for undue hardship, we file adversary cases to show that in many cases, private student loans are actually nothing more than consumer loans disguised as student loans. If we can show that the private loan is a non-qualified education loan, it is discharged like any other consumer debt such as a credit card. Various arguments exist such as the loan amounts were beyond the cost of attendance, for an ineligible institution or for an ineligible student. We teach this topic to other attorneys around the nation and while it is a relatively new argument, there is plenty of case law supportive of discharge. If you have an attorney tell you that a student loan can never be discharged in bankruptcy, that is the old and very outdated view, and frankly, you should see another attorney who actively practices in this area every day.
The procedure is as follows:
The well known Brunner standard is followed in Florida which requires that you show:
the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for the debtor and the debtor’s dependents
additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans and
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:
Student Loan Bankruptcy Hardship Provison
So what happens if you are really struggling and you feel your financial situation is so bad you just will not be able to pay back your student loan? If it has been five years or more since your ceased to be a student you may apply to have your student loans discharged in a bankruptcy under what is known as the hardship provision.
The court MAY order non-application of Section 178 if:
- At any time after five years after a bankrupt who has a debt referred to in paragraph ceases to be a full- or part-time student, as the case may be, under the applicable Act or enactment, the court may, on application, order that subsection does not apply to the debt if the court is satisfied that
- the bankrupt has acted in good faith in connection with the bankrupts liabilities under the debt and
- the bankrupt has and will continue to experience financial difficulty to such an extent that the bankrupt will be unable to pay the debt.
What this means is that you may apply to court to have your student loan reduced or discharged after five years. You must be able to satisfy the court that you have and will continue to experience undue financial hardship that will prevent you from paying back your student loans, that you have made all efforts to repay those loans including applying for repayment assistant programs and that you used your student loan money appropriately.
Government Versus Private Loans
The federal government is the lender for a significant percentage of student loans. However, private financial institutions, such as banks, also offer loans to students, primarily because many students cannot fund their entire education without such supplementation. It doesn’t matter whether you have a government or a private student loan. To discharge either in bankruptcy, you must show that repaying the loan would cause undue hardship.
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New Student Loan Bankruptcy Law As Of 2008
Effective July 7, 2008, Section 178 of the Bankruptcy and Insolvency Act was amended to allow creditors, notwithstanding that an individual may have gone bankrupt, to enforce the repayment of Student Loans if less than seven years had passed since an individual graduated from or last attended school. It has been determined that the date of relevance for the seven year cutoff for Student Loans is the last day of the semester which was attended or graduation date, not the actual last day attended in that semester, if that occurred earlier. These amendments apply to debtors in bankruptcy, but who do not have a discharge before July 7, 2008, and to debtors who file for bankruptcy on or after July 7, 2008.
Individuals who have quit or left school part way through a semester or prior to the end of a course are cautioned, and should be aware that their date of last attendance is not the date to consider when making the seven year determination.
Individuals who have been out of school for just under seven years may want to consider the timing of any assignment into bankruptcy they intend to make, and take steps to delay the filing of a bankruptcy.There may be cases, however, where an individuals debts and the pressure from creditors are so significant that a bankruptcy is warranted even if the Student Loan will survive. This will depend on how many other debts an individual has and how large they are.
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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.
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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.