Student Loans And Bankruptcy
When one files for bankruptcy, the bankruptcy court may eliminate debts by “discharging” them. Debts that are non-dischargeable are those that generally cannot be eliminated through a bankruptcy filing and will need to be paid. For cases filed prior to October 17, 2005, a student loan may be dischargeable if the program under which your student loan was issued involved only for-profit, private entities. However, if the program is funded in whole or in part by non-profit institutions , the loan is not dischargeable in bankruptcy. For cases filed on and after October 17, 2005, and under current law, both federal and private student loans are not dischargeable in bankruptcy unless you can show that your loan payment imposes an “undue hardship” on you, your family, and your dependents. Historically, it has been very difficult to meet the requirements of “undue hardship.” Courts have generally disfavored discharge of student loans, but some courts will discharge part of a student loan if repaying it all would be an undue hardship. In order to have a student loan discharged on undue hardship grounds, you must file a separate motion with the bankruptcy court and then appear before the judge to explain your hardship.
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.
Private Student Loans Bankruptcy Legislation
Since 2005, members of Congress have introduced legislation to restore the dischargeability of private student loans without having to prove undue hardship. To date, no
- The Fresh Start Through Bankruptcy Act of 2021. Sponsored by Senators Dick Durbin and John Cornyn . If passed, this bill would allow borrowers to discharge federal and private student loans 10 years after the first loan payment comes due.
- Private student loan Bankruptcy Fairness Act of 2019. Re-introduced by Congressmen Steve Cohen , Danny K. Davis , and Eric Swalwell on August 3, 2021. This Act proposes to make student loans made by private lenders automatically dischargeable in bankruptcy without the need to file an adversary proceeding.
- Medical Bankruptcy Fairness Act of 2021. Sponsored by U.S. Senators Tammy Baldwin , Sheldon Whitehouse , Sherrod Brown , Elizabeth Warren , and Richard Blumenthal . This Act would allow âmedically distressed debtorsâ to wipe out their student loans without having to meet the undue hardship standard or pass the Brunner Test.
If Congress passes any of these, the law will apply to borrowers who filed bankruptcy after the date of the legislation is passed. It would not apply retroactively to people who already received a discharge.
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Very Few Attorneys Work These Cases
There are many attorneys that work traditional bankruptcy cases, but Iuliano points out that only a handful of them actually work on student loan bankruptcies as the main core of their practice.
And having a good attorney is a very important part of the process, says Iuliano.
Since getting student loans discharged is such a difficult task, you will need an attorney that knows all the tips and tricks to litigate the case effectively. If youre unsure where to find a good attorney for your case, you can check out Lexria , which is an online platform that connects borrowers with attorneys that specialize in student loan bankruptcies.
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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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.
Good Faith Efforts To Repay
The third factor that courts look at is whether you have made good faith efforts toward repaying your student debt. This is a measure of your efforts to obtain employment, maximize income, and minimize expenses. Some considerations that courts have taken into account include making payments when the debtor could, seeking deferment when necessary and negotiating an income-driven repayment plan. If you would qualify for an income-driven repayment plan, but you fail to sign up, this will be a negative factor for your case.
It is also important to note that the court will look to see if the student debt is a significant portion of your overall debt such that if you are able to discharge other debts in bankruptcy, you will free up money that can be used to pay off your student loans.
If you have consistently put in the effort to make payments and avoid missing payments at all costs, this can generally be an easier prong to prove. Nevertheless, when you are trying to discharge student loans in bankruptcy, it is critical to show you have made good faith efforts to repay.
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What Outcome To Expect
If you pursue student loan discharge in bankruptcy, there are three possible outcomes.
- Full discharge: The court may decide that your debt will be fully discharged, and you will not have to make any more payments.
- Partial discharge: A portion of your debt may be discharged, but youll be responsible for the rest based on your individual circumstances and ability to repay. For example, a court may decide that you cannot repay your private student loans and discharge them, but you may still have to repay your federal loans, because youd be able to afford to cover them under an alternative payment plan.
- No discharge: You may be required to repay the full balance of your loans. However, the court may adjust other aspects of your loan, such as your interest rate, if it determines that such a change would make repayment financially possible for you.
Its important to keep in mind just how few people who file for bankruptcy will end up with one of the first two outcomes. As we noted above from a 2011 study, just 0.04% of people who declared bankruptcy and sought to have their loans discharged received a partial or full discharge of student loan debt.
Plus, even a successful discharge of student loan debt carries the long-term effects of a bankruptcy on your credit. The bankruptcy process isnt for everyone, and its important to understand the details before taking any action.
When To File An Adversary Proceeding: Chapter 7
If you choose to file for Chapter 7, you can file the adversary proceeding right after filing your bankruptcy case. If you’ve already gone through Chapter 7 bankruptcy and your case has been closed, you may still be able to file an adversary proceeding to get your student loans discharged. How much time you have to do so depends on where you live and the courts.
If your Chapter 7 case is already closed, you must first move to reopen your bankruptcy case. This is procedural and does not restart the bankruptcy or eliminate the discharge you may already have received for your debt.
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Qualifying For Student Loan Bankruptcy Discharge
A discharge of your student loans may be possible if you prove you have an undue hardship that prevents you from making student loan payments, orwith private loansif the loans did not provide an educational benefit.
With federal student loans, there is no standard set of guidelines for demonstrating undue hardship. Most courts rely on the Brunner Test, which requires you to prove that:
- You wouldnt be able to maintain a basic living standard if you made loan payments.
- Your financial hardship will last an extended amount of time.
- You made a good faith effort to repay your loans before filing for bankruptcy.
Not only are these circumstances extremely challenging to prove, the Brunner Test is somewhat subjective. Not only every state, but every jurisdiction will have different standards in determining whether the Brunner Test applies, said Leslie Tayne, a financial attorney and the founder and managing director of Tayne Law Group, in an email to The Balance.
Its not the only test that exists, however. The courts of the Eighth Circuit, for example, use the totality of circumstances test, which looks at the borrower’s overall situation. This benchmark is considered less restrictive than the Brunner Test.
Private Student Loans Can Now Be Discharged In Bankruptcy But Consider The Alternatives First
In July 2021, a federal court ruled that private student loans can be discharged in bankruptcy. But student loan refinancing may offer a better way to manage your college debt without significantly damaging your credit score.
Bankruptcy is a legal proceeding that provides financial relief for consumers who cannot repay their debt. Many types of debts can be forgiven in bankruptcy, including credit card debt and medical debt. But certain types of educational benefits, such as federal student loans, cannot be discharged in bankruptcy.
In previous bankruptcy cases, it was unclear whether private student loans were dischargeable loans until July 2021, when a federal court ruled that private student loans are not considered qualified higher education expenses under the U.S. Bankruptcy Code.
Discharging private loans in bankruptcy may provide much-needed respite for debtors who can’t meet their debt obligations, but bankruptcy has a lasting impact on an individual’s finances and credit score. It’s important to consider the alternatives before resorting to bankruptcy.
If you’re having trouble making your private student loan payment, then refinancing may be the answer. By refinancing your college debt to a lower rate, it may be possible to reduce your monthly payment so you can avoid defaulting on your loans.
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Student Debt Less Than Seven Years Old
If your student loan is less than 7 years old, then you still have student loan forgiveness options that can help make repayment of your student debt easier. Negotiate new payment arrangements. Try contacting the student loans office to negotiate a new payment arrangement. Repayment assistance is available through the National Student Loan Service Centre and their Repayment Assistance Plan. You can:
- Ask for a temporary reduction in payments including making interest only payments.
- Ask for more time to repay your student debt. You can extend your payment period for up to 14.5 years.
- Apply for a hardship reduction. The government will reduce your interest costs for the first 10 years and may reduce the principal owing after 10 years. However, you must prove financial hardship to qualify, including meeting an income threshold and approval is not guaranteed.
Be aware that the first two options will keep you in debt longer and will increase the total interest you pay on your student debt. The hardship option is the only option, other than bankruptcy or a consumer proposal, that will reduce the total student loan payments you make over time. If you are successful in negotiating new student debt repayment terms, do your best to maintain the payments to sustain your agreement. The area of bankruptcy and student debt can be complicated. We answer more questions on our student debt help FAQ page.
Bankruptcy And Financial Aid
This page answers common questions about the relationship between bankruptcy and financial aid, such as student loans. The first answer concerns the impact of bankruptcy on eligibility for student loans. The second answer discusses whether student loans can be discharged through bankruptcy.
Thanks to Pat Somers of the Univ. of Arkansas at Little Rock and Art Bilski of the Illinois Student Assistance Commission for their assistance with this section.
Bankruptcy and Eligibility for Financial Aid
Will a bankruptcy affect a students future eligibility for student loans and other financial aid?
The answer to this question is a complex one because several issues are involved. It depends on the nature of the student loan programs and the type of bankruptcy.
Whatever the circumstances behind the bankruptcy, the student should talk with the financial aid administrator at the school he plans to attend, and explain the situation. The financial aid administrator may be able to guide the student to certain loan programs or lenders that may fit his needs.
Generally speaking, a bankruptcy should have no impact on eligibility for federal student aid.
The anti-discrimination rules appear in 11 USC 525:
Discharging Student Loans Through Bankruptcy
- if the borrower files an undue hardship petition
Types of Bankruptcies
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Chapter 13 And Student Loans
A case under chapter 13 is often called reorganization. In a chapter 13 case, you submit a plan to repay your creditors over time, usually from future income. These plans allow you to get caught up on mortgages or car loans and other secured debts. If you cannot discharge your student loans based on undue hardship in either a chapter 7 or chapter 13 bankruptcy, there are still certain advantages to filing a chapter 13 bankruptcy. One advantage is that your chapter 13 plan, not your loan holder will determine the size of your student loan payments. You will make these court-determined payments while you are in the Chapter 13 plan, usually for three to five years. You will still owe the remainder of your student loans when you come out of bankruptcy, but you can try at this point to discharge the remainder based on undue hardship. While you are repaying through the bankruptcy court, there will be no collection actions taken against you. You may have other options, depending on how judges decide these cases in your judicial district. For example, some judges allow student loan borrowers to give priority to their student loans during the Chapter 13 plan.
Does Bankruptcy Clear Private Banks Student Loan Debt
A private student loan is a loan given to finance higher education. Its interest rates are higher than that of a federal loan. A federal loan is a loan that is given by the government. A potential candidate may qualify for a lower interest if he or she has excellent credit, and also qualify for a higher borrowing limit.
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Can You Discharge Private Student Loans In Bankruptcy Financial Options For Students
The following article is a summary prepared by the authors of various articles about bankruptcy. It is not intended as, and should not be read as, legal advice. If you feel you need to consider bankruptcy, you should contact an attorney in your area who is qualified to lead you through this complex and weighty decision. You should not rely on this article or any Internet article to guide your decision.
Contrary to conventional wisdom, a private student loan, much like a federal student loan, is dischargeable under the right circumstances and has been since 2005. Popular thought may lead you to believe that filing bankruptcy on your private student loans is hopeless, but thats not exactly true.
If you cant repay your student loans, or you do not qualify for public service loan forgiveness or flexible student loan repayment plans, such as an income driven repayment plan, extended repayment plan, or Pay As You Earn Repayment Plan , then bankruptcy may be an option to consider. This is especially true for borrowers who take loans out after , as Congress looks to end PSFL and other repayment programs.
As a student, you can also take advantage of credit cards intended just for students to begin building your credit and earning rewards. Check out Credit.coms expert guide to the best credit cards for students to earn cash back and save on things like books, dining, entertainment, and even electronics.
Lawmakers Call For Investigation After Npr Report On Troubled Student Loan Program
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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