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.
Let Ted Troutman Help
If you feel hopelessly buried under the burden of student loans and other overwhelming debt, speak with Mr. Troutman. He has more than three decades of experience helping clients begin new debt-free lives. Whether your case is simple or complicated, he will help. You can visit him in either of his two convenient locationsin downtown Portland and Beaverton. Send his staff an online messageto schedule a free consultation or call during office hours.
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If You Need Additional Student Loan Help
If youre struggling with your student loan debt, first speak with your servicer or lender to:
Discuss repayment options.
Take a temporary payment pause.
Temporarily reduce your monthly payments.
If your problem is with your lender or servicer or youre not getting the help you need, look for a legitimate student loan help organization that offers counseling. Consider these vetted resources for student loan help they are established organizations with verified histories:
Student loan help resource
Advice on debt settlement, bankruptcy, default and forgiveness. Licensed in Missouri and Illinois.
Many of these organizations offer advice for free. In some cases, you may need to pay a fee, as with a certified nonprofit credit counseling agency or if you hire an attorney.
None of the organizations above calls, texts or emails borrowers with offers of debt resolution.
Offers of help that you have not sought out are likely to be scams. While its not illegal for companies to charge for services such as consolidation or enrollment in a payment plan, those are steps you can do yourself for free.
Avoid any debt relief companies that demand money upfront.
How To Discharge Student Loans In Bankruptcy
The bankruptcy court will not proactively determine whether repayment of your loans would cause you and your dependents undue financial hardship. You must jumpstart the process. You can do so after filing for Chapter 7 or 13 by submitting a complaint known as an adversary proceeding. A knowledgeable bankruptcy attorney can help you prepare and file this document.
Once the court receives your complaint, it will conduct an adversary proceeding, which your lenders will be permitted to attend in order to challenge your complaint.
Determining Undue Hardship:
The court will apply a certain test to your finances in order to detect the likelihood of undue hardship. The most common one is called the Brunner Test. However, some courts use the Totality of the Circumstances Test or others less common.
The Brunner Test considers three factors, all of which must be present in your case:
Pending the courts decision, you do not need to continue paying your student loans. When you file for bankruptcy, a federal injunction called the automatic stay immediately suspends most collection efforts including attempts from your loan servicer while your case is open or until the court permits your creditors to pursue action.
If Your Discharge Is Approved:
If Your Discharge Is Denied:
If you fail the Brunner Test, you will need to continue repaying the balance on your student loans upon discharge or when the court allows your creditors to resume collection.
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The Undue Hardship Exception
To have your student loan discharged in bankruptcy, you must demonstrate that it would be an undue hardship for you to pay them. The test for determining undue hardship varies between courts. Also, many courts look at the undue hardship test as all or nothingeither you qualify to get the whole loan discharged, or you don’t. Other courts have discharged a portion of a debtor’s student loan.
Regardless of the test used, most courts are reluctant to discharge a student loan. However, if you have very low income or your loan is from a for-profit trade school, you might have a better chance.
Does Bankruptcy Clear Student Loan Debt
Thought it is difficult to get student loan debt discharged, its not impossible. According to a 2011 study, nearly 40 percent of borrowers who do decide to include their student loans in their bankruptcy filing have a portion of their student loan debt eradicated. The study also found that only 0.1 percent of former students who file for bankruptcy choose to include their student loan debt in their bankruptcy proceedings.
If you qualify for and can manage income-based repayment or one of the other options provided by your loan provider, those options may be preferable. But if your debt is overwhelming and your life circumstances dont allow you to continue making payments, theres no shame in including your student loan debt in bankruptcy proceedings.
If youre considering filing for bankruptcy discharge, youll need to determine whether your situation falls under Chapter 7 or Chapter 13 bankruptcy.
The difference is simple. According to USA Today, Chapter 7 filers have virtually no income to pay back any of their debts Chapter 13 filers might be able to repay at least part of their debt if their student loans were restructured to make them more manageable.
According to recent studies by Jason Iuliano, then a Ph.D. student in Politics at Princeton University, nearly four in ten students that attempted student loan discharge found success. While a forty percent rate means that a majority of people arent successful in their endeavors, its also not inconsequential.
Bankruptcy May Not Be The Best Option
Bankruptcy is, by its very nature, a long and complicated process. Those with burdensome student loans have certain other options they should first investigate, including:
Income-driven repayment plan: This is a federal student loan repayment option that can lower monthly payments for those who qualify. It is based on specific factors, such as income, family size, loan type, and current location.
Student loan forbearance or deferment: For debtors with federal student loans, this option can temporarily reduce or even suspend payments to help them avoid defaulting on their loans.
Loan forgiveness: Hardship programs through certain private lenders or the government can forgive loans for debtors who are employed by certain government or non-profit organizations. The Public Service Loan Forgiveness is one such program.
Mr. Troutman can provide additional information about these and other programs to his clients with student loans who wish to avoid bankruptcy.
You May Be Successful According To A Student Loan Bankruptcy Lawyer
Villanova University School of Law professor Jason Iuliano studied this issue. He published a law journal article in 2014 stating that there was hope for those deep in student debt. He reviewed student loan bankruptcy disputes across the country. Iuliano found hardship discharges were granted to nearly 40 percent of debtors seeking one. His research showed that successful debtors, generally, were:
- Less likely to have a job
- More likely to have a medical hardship
- More likely to have lower income the year before they filed for bankruptcy.
The biggest problem facing bankruptcy filers is that they didnt try to get student loans discharged . Iuliano wrote that tens of thousands more bankruptcy filers would probably be successful if they tried. Thanks to the work of a student loan bankruptcy lawyer, one of those people may be you.
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Why Should I File Bankruptcy If I Have Student Loans
Even though your student loan may not be dischargeable in a Chapter 7 or Chapter 13 bankruptcy case, you might still greatly benefit from filing for bankruptcy relief. In a Chapter 7 case, you could discharge your other unsecured debts, making it easier for you to afford to pay your student loan payments.
The same is true in a Chapter 13 case. However, in the Chapter 13 case, some of your student loan debt is paid through the Chapter 13 bankruptcy plan, and the student loan is in forbearance. You are not required to make your student loan payments during your Chapter 13 case, but you will owe the loan and the interest when your bankruptcy case is complete. Some debtors make small payments to their student loan company during the Chapter 13 case to help reduce the debt while other debtors prefer to wait until the Chapter 13 case is closed to resume student loan payments.
Contact A Jacksonville Bankruptcy Attorney For Help With Student Loans
Student loan debt is a crushing financial burden for many individuals and families. If you are struggling with student loans, a bankruptcy filing may help.
Call The Law Offices of Justin McMurray, P.A. at 904-248-4482 or use the contact form on our website to request a free consultation with our Jacksonville bankruptcy lawyer.
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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.
Can You File Bankruptcy On Student Loans
Filing bankruptcy on student loans is possible, but youll have to go through a difficult process to do so. To discharge your student loan debt through bankruptcy, you have to prove that you cant pay back your student loans without it having an extremely negative impact on you and your dependents.
Courts are left with some room to interpret your eligibility. Most, but not all, federal courts of appeal evaluate hardship using a set of standards known as the Brunner Test, which was established as the result of a 1987 federal court ruling, Marie Brunner v. New York State Higher Education Services Corp.
Can you file bankruptcy on student loans? First, can you pass the Brunner test?
|The factors of the Brunner test are outlined by the U.S. Department of Educations Federal Student Aid office and include three main points:
Other courts, namely the 1st U.S. Circuit Court of Appeals and the 8th U.S. Circuit Court of Appeals, rely on a different standard, known as the totality of circumstances, which considers your past, present and future financial resources reasonable living expenses and other relevant factors related to bankruptcy proceedings.
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Bankruptcy And Student Loans
Filing for bankruptcy helps U.S. citizens who can no longer pay their debts get a fresh start. In most cases, individuals either liquidate their assets or create a repayment plan in order to settle their debts.
Typically, people file for bankruptcy when they have trouble making minimum payments on their credit cards, are constantly being harassed by bill collectors, use credit cards to pay for basic necessities, or just generally feel that they are out of control of their financial prospects.
When it comes to student loans, however, bankruptcy can get a little hairy.
Student loans are difficult, but not completely impossible to discharge when filing for bankruptcy. In order to do so, however, you must prove that paying student loans will impose a significant hardship on you, your family, and your dependents.
In most court cases, an evaluation called a Brunner Test is used to determine whether individuals are able to pay for their student loan payments, or whether their student loan debt might be eradicated.
Under the Brunner test, a bankruptcy judge will examine three factors to best determine whether your student loans could cause undue harm.
Private Student Loan Bankruptcy Issues
If your student loans are private bank loans like a student line of credit or student credit card debts, then these types of consumer debts are eligible for automatic discharge under the BIA no matter how old they are. This is true for student loans that are not guaranteed by the Ontario or Canadian government. Private student loan debt in bankruptcy is treated like any other unsecured consumer debt. It is automatically discharged with no waiting period. If you are unsure about whether your private student debt qualifies for elimination through a bankruptcy or consumer proposal, book a free consultation with one of our Licensed Insolvency Trustees to talk about your situation.
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What Happens If The Bankruptcy Court Doesnt Discharge My Loans
Once you move forward with Chapter 7 or Chapter 13 bankruptcy, three possible scenarios might play out. You could see all of your student loans and other debts wiped away completely, your loan could be partially discharged or you could have to repay your loan under better terms, such as with a lower interest rate or monthly payment. You may also fail at having the terms of your loans changed at all during bankruptcy proceedings, which is a risk youll need to take.
If the courts do not find your claim of undue hardship adequate to qualify for bankruptcy, you may have no choice but to carry on in an effort to repay your loans. Some of the options you can consider at this point include:
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Can Your Debts Be Erased In Student Loan Bankruptcy Yes Heres How
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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.