Can Bankruptcy Get Rid Of Student Loans
Filing bankruptcy can allow you to eliminate debt and get a clean slate financially, either through a structured payment plan or a liquidation of your assets. Many types of debt can be discharged in bankruptcy, but student loans typically aren’t included on that list.
It is possible to include student loan debt in your bankruptcy filing and get it approved by the court if you can prove undue hardship, but that process can be difficult. If you’re struggling financially and are thinking about filing bankruptcy, here’s how to know if your student loans are eligible.
Can I Declare Bankruptcy On Student Loans
Youve probably heard that student loans cant be discharged in bankruptcy. Thats not entirely true. It is possible to discharge student loan debt in bankruptcy, but it is difficult, and attempts to do it often fail. It requires additional legal proceedings that will almost certainly require the assistance of an experienced attorney. If you are considering trying to discharge student loans through bankruptcy you should understand whats required and consider other alternatives.;
Understanding Bankruptcy And Student Loans
Most individual debtors file under either Chapter 7 or Chapter 13 of the Bankruptcy Code.
- Chapter 7 bankruptcy seeks to have debts discharged completely but requires the debtor to demonstrate that their income is so low that they cant meet basic living costs and have anything left over to pay toward their debts. This is similar to what is required for a student loan bankruptcy discharge.
- Chapter 13 bankruptcy results in a plan to pay some or all of your debts over three to five years. Part of your debts can be discharged, but maybe not all of them. This is designed for those who have something left over to pay toward their debts after meeting basic living expenses. You wont get student loan forgiveness in Chapter 13, but you may be able to pay a reduced monthly payment on your student loans during the payment period.
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Can You Put Student Loan On Bankruptcy Good Faith
The Registrars finding was that Ms. Morrisons actions evidenced an underlying behaviour of good faith but that objective was overborne by life getting in her way. The Judge accepted the part that life got in her way might be real in regard to the very early post-student years of 2008-2014. However, he decided that starting in 2014 she began to make a relatively decent living, yet made no effort to start to repay her student loan debt.
The Judge analyzed Ms. Morrisons behaviour once she started earning a better income in 2014 and her statements concerning why she filed for bankruptcy. He also remarked that it was plain from her rancour and annoyance directed at her Trustee because her strategy to have bankruptcy free her from her student loan debt failed. She felt the Trustee did not advise her properly on the timing of the bankruptcy as related to when she ceased to be a full-time or part-time student. She was upset that she had this student loan bankruptcy discharge Canada issue.
The Judge then reviewed what are the things he must consider in trying to determine good faith. He stated that the relevant cases suggest, good faith that has to be shown in order for the application to succeed connects to the loan, not the bankrupts general behaviour throughout the bankruptcy. He said the things he must consider are as follows:
Therefore, the Judge disagreed with the Registrar. He found that she did not meet the test of acting in good faith.
If Youre Drowning In Student Loans With No Solution In Sight You Might Have Considered Declaring Bankruptcy
Unfortunately, discharging student loans in bankruptcy can be one of the most challenging tasks in whats already a complicated legal process.;Still, trying to get rid of student loans in bankruptcy can make sense for some borrowers. If you think it might be worth the effort, heres what you should know before getting started.
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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.
Loan Discharge Because Of Disability
If you are disabled, you may be able to get your loans discharged without having to go through bankruptcy proceedings.
With certain federal loans, Total and Permanent Disability Discharge is available to those who are totally and permanently disabled. If youre eligible, the loan servicer can forgive the total remaining balance of your loans. For more information and how to apply, visit DisabilityDischarge.com.
Although not all private loan lenders offer discharges in the case of disability, some do. For example, College Ave will forgive the remaining balance if the borrower becomes permanently disabled.
If you have a disability and want to apply for a loan discharge, contact your lender directly via the customer service department. Explain your situation and what has changed since you took out the loans, and ask if the lender offers loan discharges in the case of disability.
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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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Check Which Debts Are Included In Bankruptcy
Most debts that you have when a bankruptcy order is made will be covered by your bankruptcy. If you become liable for things such as court costs or benefit overpayments because of something that happened before the date of your bankruptcy, any debts that arise will still be included in your bankruptcy order. This includes if youre asked to pay them after youre discharged from bankruptcy. This means you won’t have to pay them at the end of the bankruptcy period.
However, there are some debts youll still need to pay after your bankruptcy period ends. Before you apply for bankruptcy, you should work out if youll still need to pay any debts, and how you’ll deal with them.
Student Loan Debt Canada Forgiveness The Decision On Appeal
The Judge agreed with CSL that the Registrar had lowered the bar on the determination of financial difficulty from what is intended in the BIA. He also found that Ms. Morrison has some capacity to make some contribution towards retiring the student loan debts concerned. The evidence also showed that CSL and OSL were open to some sort of repayment offer.
Accordingly, the Judge determined that the demands of s 178 have actually not been met by Ms. Morrison and her original application is unsuccessful. Therefore, he reversed the Registrars decision and allowed the appeal of CSL and OSL.
The Judge further ordered that she is, nevertheless, at liberty to make a re-application no earlier than one year from the date of his decision. He further stated that any re-application will need to be supported by proof of good faith in relation to any kind of settlement to either CSL or OSL as well as her full disclosure of her financial position at that time.
The Judge said he did not wish to pile on, so he did not order any costs to be paid.
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Criteria Based On Student Loan Characteristics
A student loan is not considered a qualified education loan if:
- The loan is owed to a person who is related to the borrower, defined as a brother or sister , spouse, ancestor or lineal descendant.
- It is a loan from qualified employer retirement plans, such as a 401 or 403.
- Timing requirements are not met. A qualified education loan is borrowed within a reasonable period of time before or after the qualified higher education expenses are paid or incurred. Loans used to pay primarily for prior-year balances are not necessarily qualified education loans. Note that this timing requirement applies only to the original qualified education loan, not any subsequent refinance of the qualified education loan.
- The loan must have been borrowed to pay for the cost of attendance as defined in the Higher Education Act of 1965 as of August 4, 1997. This includes tuition and required fees, room and board, books, supplies and equipment, transportation, miscellaneous personal expenses, dependent care costs, study abroad costs, disability-related expenses and loan fees. It does not include room and board for students enrolled less than half time, the cost of obtaining professional licensure or certification, and the rental or purchase of a personal computer.
Above And Beyond Normal Circumstances
The second factor that courts will take into account is whether you have circumstances that are above and beyond normal circumstances and whether these circumstances will extend throughout a significant portion of the term of the loan. This can be tough to show in some cases because it can be subjective and speculative.
Some of the potential circumstances that courts have seen as above and beyond normal circumstances include serious mental or physical disability of the individual or the individuals dependents which prevents employment and circumstances relating to an individuals employment opportunities including poor quality of education, maximized income potential in the chosen education field, and limited remaining years in the individuals work life.
As stated above, these circumstances must extend throughout a significant portion of the loan. They can not simply be a temporary situation that is likely to change in the near future. Due to the subjective nature of this factor, you will require the submission of evidence to prove your circumstances.
When you are trying to discharge student loans in bankruptcy, it is critical to show your circumstances are above and beyond normal circumstances. Our experienced student loan lawyers are skilled in putting together the best argument and supporting evidence, including expert reports, etc., to show that your circumstances are above and beyond normal circumstances.
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Get A Bankruptcy Attorney
A borrower is more likely to obtain a bankruptcy discharge of their student loans if they are represented by an experienced attorney.
However, most bankruptcy attorneys are unwilling to pursue an undue hardship claim because these cases involve an adversarial proceeding, which are expensive and involve a lot more work. It can cost $10,000 or more to pursue an adversarial proceeding and borrowers who file for bankruptcy usually dont have the money to pay the lawyers fees. Lenders are also likely to appeal the decision, so a favorable decision is unlikely to be final.
Even if you dont have an attorney and are representing yourself pro se, always show up in court. If you dont show up when required, the lender can win the case by default.
How To Get Student Loans Discharged In Bankruptcy
Student loans must pass an extra test in order to be wiped out in bankruptcy. Many courts use the Brunner test, named for a 1987 court case, to determine whether your loans present an undue hardship to you and any dependents. You can prove undue hardship by demonstrating that:
- Repaying student loans prevents you from maintaining a minimal standard of living for you and your dependents, according to your current income and expenses
- This will likely not change throughout the rest of the loans repayment term
- Until now, you have done your best, or made a good faith effort to pay off the loans
To file for bankruptcy, youll first complete a mandatory credit counseling course, then submit details about your debt and financial situation to the U.S. Bankruptcy Court. For a Chapter 7 proceeding, youll have to show that youre unable to pay the debts based on your means. A bankruptcy trustee will be appointed to handle liquidation of assets under Chapter 7, and the repayment plan under Chapter 13.
Youll have to take an additional step as part of the bankruptcy filing process in order to petition for your student loans to be cancelled. This is called an adversary proceeding, and it will request that the court determine you meet the undue hardship test based on the financial circumstances you provide in your petition.
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Take Steps Early To Avoid Credit Damage
If you’re not sure you can make your student loan payments, take steps early to avoid missing payments and default. Both of these scenarios can damage your credit score, making it difficult to qualify for refinancing or get approved for favorable credit terms in the future.
As you decide the best path forward for you, monitor your credit regularly to understand how your actions impact your credit score. Credit monitoring can also help you spot potential issues before they cause significant damage.
Can Student Loans Be Cleared Through Bankruptcy 4 Questions Answered
For decades, student loans have mostly been prohibited from being discharged through bankruptcy proceedings. That could change under the FRESH START through Bankruptcy Act. Here, public policy scholars Brent Evans and Matthew Patrick Shaw, both of Vanderbilt University, explain why student loan debt cannot usually be cleared through bankruptcy and how that might change if the proposed bill becomes law.
The Appeal Of The Registrars Decision
I wont go into all of the details leading up to Ms. Morrisons bankruptcy. If you want to read about it, check out my September 4, 2019, Brandons Blog, CANADA STUDENT LOAN FORGIVENESS: BANKRUPTCY TREATS STUDENT LOANS FAIRLY.
The Registrar discovered that the timing of when Ms. Morrison filed for bankruptcy compared to the seven-year cut-off was very close. The bankrupts key interest and her intent at the time of meeting with the Trustee were to get a discharge from all of her creditors on equal ground. The Registrar decided that Ms. Morrison did not seek bankruptcy to avoid only her student loan debt but rather to deal with every one of her debt problems.
There was obviously miscommunication between Ms. Morrison and her Trustee. The problem was that the miscommunication aggravated her specified objective.
The federal government did not oppose the discharge. The Registrar decided that her student loan debt should be discharged. He made a conditional order of discharge taking everything, including her surplus income, into consideration.
Both Canada Student Loans , as well as Ontario Student Loans , appealed the Registrars decision to a Judge of the Court of Queens Bench of Alberta. The reason OSL was involved was that her education was in Ontario. She later moved to Alberta to pursue work opportunities.