Meet With A Bankruptcy Lawyer To Discuss Your Case
Hiring a lawyer isnt absolutely necessary to file for bankruptcy, but it can make navigating the process a lot easier especially with student loans. Look for a bankruptcy attorney that will work pro bono you likely cant afford to pay hundreds or thousands of dollars in legal fees.
Before you sign a retainer, you might want to set up a consultation to find out if they think you have a case.
Landmark Bipartisan Bill Would Allow Student Loan Discharge In Bankruptcy: Key Details
WASHINGTON, DC – MAY 19: Sen. Richard Durbin asks questions during a Senate Appropriations … Subcommittee hearing on May 19, 2021 in Washington, DC.
A new, bipartisan bill that will be introduced into the Senate would allow borrowers to discharge their student loan debt through bankruptcy.
The bill, called the Fresh Start Through Bankruptcy Act, would amend the bankruptcy code to more easily permit student loan discharges under certain conditions. The bill is sponsored by Senator Richard Durbin and Senator John Cornyn .
While it is not impossible under current law to discharge student loan debt through bankruptcy, it can be quite difficult. To do so, most borrowers must show that they have an undue hardship, which is a challenging legal threshold to meet. The bankruptcy code itself does not adequately define what undue hardship even means, so courts have created tests , to help judges issue rulings about whether or not a borrower meets the tough standard. In many jurisdictions, borrowers must prove that there is a certainty of hopelessness to their circumstances an often impossible task.
Legislative text for the bill should be released in the coming days, which will provide more details on the particulars of the reform proposals.
How Does Bankruptcy Affect My Credit
Bankruptcy is often considered a last resort option for managing debt, student loan-related or otherwise because of the effect it can have on your credit. Here’s how:
The full extent of the damage may depend on what your credit was like before you filed.
“Borrowers with a moderate to high credit score pre-bankruptcy are likely to see sharper declines than those with already low scores,” said Brainard.
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How The Bankruptcy Trustee Pays Your Student Loans
As you make your monthly payments to the Chapter 13 trustee, the trustee will forward a portion of your plan payment to your student loan lender. Whether that money will reduce your principal or only cover interest will depend on the terms of your loan. Interest will continue to accrue on your student loans while you are in Chapter 13.
What Qualifies As Undue Hardship
Unfortunately, bankruptcy law is unclear on what makes undue hardship.
Congress never defined what undue hardship means, Kantrowitz says. They left it up to the courts to define it.
Bankruptcy courts are free to use two different tests to decide if the borrower is experiencing undue hardship the Brunner test and the Totality of the Circumstances test. According to Kantrowitz, the Brunner test is far more widely used.
Under the Brunner test, the debtor must prove three things.
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Pursue A Career In Public Service
If 20 to 25 years sounds way too long to wait, consider pursuing Public Service Loan Forgiveness, or PSLF. This program requires you to work for a qualifying employer in the public service sector.
Even better You wont be taxed on the amount forgiven, said Miranda Marquit, my former colleague and senior writer at Student Loan Hero. However, she added, You do have to spend 10 years at a nonprofit or government job. This can mean lower pay for those 10 years.
And though the Donald Trump administration has proposed significant cuts to both IDR and PSLF in the budget proposal and PROSPER Act, any changes would only apply to new borrowers as of July 1, 2019. In fact, 2018 is the first year borrowers have been eligible to have their loans forgiven under PSLF and at least one person already has had his loan forgiven.
So if youve been working a low-paying job as a public servant while paying off your student loans, you could be rewarded with a tax-free gift from Uncle Sam.
How Student Loan Bankruptcy Works
If youre considering student loan bankruptcy, falling behind on your payments will have had a major impact on your life. Perhaps your wages have been garnished because a lender took out a judgment against you. The federal government may have kept your tax refund and applied it to your federal student loans because they were delinquent or in default.
Your student debt is probably just one component of the financial challenges you are currently facing. In fact, if student debt is your only problem, you are unlikely to succeed in getting it discharged through bankruptcy. Filing for student loan bankruptcy is not easy and does not guarantee that you will walk away debt-free. But if your credit is shot, bankruptcy could be a faster path to financial health than continuing to struggle to pay your debts.
There is no special type of bankruptcy called “student loan bankruptcy.” Succeeding in having student loans discharged through bankruptcy involves filing Chapter 7 or Chapter 13 and then taking an additional step, which is filing an “adversary proceeding,” or AP. The AP must be filed to have your student loans considered for discharge.
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Most Back Taxes And Customs
This generally includes income taxes, Social Security taxes and penalties you owe, or unpaid withholding tax for your employees.
Although most back taxes cannot be discharged in bankruptcy, you may be able to have taxes discharged if they are for a return due 3 or more years ago and you meet certain other qualifications.
If you owe significant back taxes you cannot pay in a reasonable period of time, you may want to ask a tax attorney or other professional about an Offer in Compromise, or OIC, or other alternatives.
Can You File Bankruptcy On Private Student Loans
What happens to student loans in bankruptcy? Can you file bankruptcy on private student loans, not just the ones you take out from the government. Find out now.
Youve made it through college on your own with private or government student loans. You are proud of your accomplishments but havent been able to make enough consistent student loan payments. And on top of that, youre falling behind in your other credit accounts, as well.
Can you file bankruptcy on private student loans? Is that even possible?
Yes, it is possible to file bankruptcy because;it is a dischargeable debt;but it is difficult to do.
The information below will help guide you on criteria for filing bankruptcy on your private and federal student loans.;The guide will also give you a tangible way forward so that you can escape hounding creditors while making barely enough money to live.
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Cost To File Bankruptcy On Student Loans
The bankruptcy court does not charge court fees to file student loan bankruptcy. However, the fee you paid your bankruptcy attorney to file Chapter 7 or Chapter 7 did not include the attorney filing an adversary proceeding for student loans. Therefore, unless you find an attorney willing to file the AP at a reduced rate, you may have to spend several thousand dollars hiring a student loan bankruptcy lawyer.
What Happens If Your Student Loans Aren’t Discharged
If, as in most cases, your loans are not discharged in bankruptcy, here’s what happens.
- Chapter 7 bankruptcy. In Chapter 7 bankruptcy, if payment of your loans is not an undue hardship, you’ll still owe them when your bankruptcy case is over.
- Chapter 13 bankruptcy. If you can’t discharge your student loans, Chapter 13 bankruptcy provides some other ways that can help. For example, you’ll likely be able to pay a reduced amount during your Chapter 13 planalthough you’ll be on the hook for whatever amount is left after your repayment period ends.
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How To File For Student Loan Bankruptcy
Discharging student loans comes at the end of the bankruptcy process. Heres what you need to do first.
1. Find a bankruptcy attorney.;While an attorney isnt absolutely necessary, working with one especially one with at least some student loan experience can help you navigate the complicated process more smoothly.
Filing for bankruptcy;costs anywhere from several hundred to several thousand dollars, depending on your location and the cases complexity. Plus,;there are attorney fees for the adversary;proceeding required to get student loans discharged.
However, you likely wont qualify for student loan bankruptcy discharge if you can afford an attorney, says Michael Fuller, a Portland, Oregon-based consumer attorney who takes on student loan bankruptcy cases pro bono.
Here’s where to find free legal help:
Legal Services Corporation: Search for local legal aid by ZIP code.
Student Loan Borrower Assistance: This nonprofit has a list of legal aid organizations by state.
Massachusetts Student Loan Bankruptcy Assistance Project: A group of attorneys and law firms offering free representation for adversary proceedings.
Oregon Student Debt: A pro bono student loan organization.
2. File for Chapter 7 or 13 bankruptcy. You must file for bankruptcy before your student loans can be discharged.;Your attorney can help determine the type of consumer bankruptcy thats best for you: Chapter 7 or Chapter 13.
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Why Cant People Get Rid Of Student Loans Through Bankruptcy Now
Although not impossible, discharging student loans in bankruptcy is difficult. Due to a 1976 law, student loans are not treated during bankruptcy proceedings like other forms of debt, such as credit card debt or auto loans. This policy stems from a federal commission on bankruptcy laws, which heard testimony that claimed the easy discharge of educational loans in bankruptcy could undermine federal student loan programs. Congress was concerned that students might borrow thousands of dollars from the federal government, graduate, declare bankruptcy to have their student loans discharged and never repay their educational debt.
In an extension of the Higher Education Act of 1965, Congress passed the 1976 law, which made borrowers wait five years after the first student loan payment was due before they could have the loan discharged through bankruptcy. Congress created an exception that allowed for discharge within that five-year period if the loan caused undue hardship.
Congress extended the five-year bankruptcy ban to seven years in 1990. Then Congress extended it to the borrowers lifetime in 1998.
Currently the undue hardship exemption is the only way to have student loans discharged in bankruptcy that is a much higher threshold than many other common forms of debt. This higher threshold includes both federal student loans and, since 2005, most forms of private student loans.
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When You Dont Meet The Undue Hardship Standard
While most people with student loan debt wont be able to meet the undue hardship test, many still need help with overwhelming monthly payments. If you fall into this category, bankruptcy provides another optionfiling for Chapter 13 bankruptcy can reduce student loan payments to a more manageable level for a three to five-year period.
For more information, see Can Chapter 13 Bankruptcy Help Me Lower My Student Loan Payment?
Procedure To Discharge Your Student Loan In Bankruptcy
If you want to try to discharge your student loan in bankruptcy, you must file an adversary proceeding to determine dischargeability with the bankruptcy court. But that’s not all. You’ll need to present evidence and prove to the court that payment of your loans will cause an undue hardship. It’s likely that you’ll need to retain an expert to testify about your ability to be gainfully employed in the future.
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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 Bankruptcy Affects Student Loans
As shown in this graph from the Federal Reserve Economic Database student loan debt has been going up steadily since 2006. As of the second quarter of 2020, outstanding student debt added up to $1.54 trillion.
An interactive version can be found at this link. In part, this is because the cost of higher education has been increasing steadily. But, the perceived inability of student loan borrowers to discharge this type of debt in bankruptcy hasnât helped.Â;
A bankruptcy filing can discharge federal student loans, but only if the bankruptcy judge finds that it would be an undue hardship for the borrower not to do so. Under current bankruptcy laws, this requires the person filing bankruptcy to bring an adversary proceeding.Â;
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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.
When Did Private Student Loans Become Nondischargeable
While federal student loans have been nondischargeable in bankruptcy since 1976, private student loans didnât receive the same treatment until 2005. That year, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act to make it more difficult for borrowers to file for Chapter 7 bankruptcy and, instead, push more debtors to file Chapter 13.
As part of the Act, Congress amended 11 USC Â§ 523 to prevent the bankruptcy discharge of education loans that did not exceed the studentâs cost of attendance at certain higher education institutions. These types of debts are referred to as qualified education loans.
How to find out if you have private student loans? The easiest way to find out what type of student loans you have is to check your credit report against the loans the Department of Education shows you have with them. You can do that by creating an account with studentaid.gov. Any student loan you see on your credit report but not on the website is a private loan.
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Can I File Bankruptcy To Rid Myself Of Student Loans
The decision to file bankruptcy shouldnt be taken lightly. It can have possible negative consequences on your credit, but sometimes, these negative consequences are much less severe than continuing to try and pay your current bills.
There are many bills and payments that can make living life nearly impossible for you and your family, but with the rising costs of education, student loans are often the largest monthly bill that needs to be paid. If youre considering bankruptcy, youre probably hoping that your massive student loans can be eliminated, but can bankruptcy really get rid of your student loans?
Student loans are not eliminated with a standard bankruptcy filing
In general, most people file under chapter 7 or chapter 13. There are some important differences between the two that an experienced student loan bankruptcy lawyer in Columbus, Ohio can walk you through. However, they do have one thing in commonneither one eliminates student loans.
The undue hardship exception
There is always an exception to every rule. Although your Columbus, Ohio student loan lawyer wont be able to eliminate your student loans with a basic chapter 7 or chapter 13 filing, an additional separate adversary proceeding or complaint to determine dischargeability can be filed. The key to this filing is to prove undue hardship.
How do you prove that paying student loans has created an undue hardship for your family? In general, you must prove that:
How likely are you to prove hardship?