What Happens If Your Student Loans Arent Discharged
If, as in most cases, your loans are not discharged in bankruptcy, heres what happens.
- Chapter 7 bankruptcy. In Chapter 7 bankruptcy, if payment of your loans is not an undue hardship, youll still owe them when your bankruptcy case is over.
- Chapter 13 bankruptcy. If you cant discharge your student loans, Chapter 13 bankruptcy provides some other ways that can help. For example, youll likely be able to pay a reduced amount during your Chapter 13 planalthough youll be on the hook for whatever amount is left after your repayment period ends.
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What Is A Private Student Loan
Federal student loans such as Stafford Loans and Plus Loans are guaranteed by the federal government. That means that if you default on these loans, the federal government pays for the loan. By contrast, if you default on a private student loan, the lender is out of luck. To be considered “student loans” the debts must be used solely for qualified higher education expenses.
Qualified higher-education expenses are the “cost of attendance” at an “eligible educational institution.” Eligible educational institutions include almost all accredited public and private, including for-profit, post-secondary institutions. That is, virtually all post-secondary institutions such as colleges and vocational institutions.
The “cost of attendance” includes tuition, fees, room, board, books, necessary equipment and materials, supplies, transportation, and even personal computers. For most students, federal student loans will only cover a portion of their necessary expenses. The student may need extra money for room, board, supplies, etc. To cover these additional expenses, students take out private loans on top of their federal student loans.
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.
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Undue Hardship And Student Loan Discharge
To succeed in having your student loans discharged, you must demonstrate that not having them discharged would cause you to experience “undue hardship.” For a bankruptcy court to take your side, you will have to meet specific conditions. The problem is that there is no uniform set of conditions.
However, your student loan creditorswhich may include lenders, servicers, and collection agencies, depending on the types of loans you have and how far behind you are on paymentsmust also meet specific conditions. They must satisfy the preponderance of the evidence standard, a high standard that requires them to prove that their claims against you are valid. They must also prove that your loans meet the conditions of section 523.
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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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.
Two: Student Loan Debt & Waiting Periods
If you owe monies on your student loans and you wait long enough, it is possible for you to eliminate this debt by taking advantage of either a consumer proposal or personal bankruptcy. If, however, you do not satisfy certain waiting periods under federal law, your student loan debt will survive your bankruptcy or your consumer proposal. Therefore, you must proceed very carefully when student loans form all or a part of your debt.
When we talk about student loans, two waiting periods are key to the timing of making a consumer proposal or filing for personal bankruptcy:
Canadas insolvency laws punish those with outstanding student loans who file for personal bankruptcy or make a consumer proposal within seven years of ceasing to be a student.
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Our Pennsylvania Bankruptcy Attorneys Can Help Relieve You Of Debt
If youre thinking about filing for Chapter 13 or Chapter 7 bankruptcy in Pennsylvania, a bankruptcy lawyer of Young, Marr & Associates can help you understand your options, rights, and responsibilities. To start discussing whether bankruptcy is right for you in a free and completely private legal consultation, call our law offices today at 701-6519 in Pennsylvania.
Bankruptcy Resource Center
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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Does A Parents Bankruptcy Affect Eligibility For Student Financial Aid
Bankruptcy is a complicated issue that affects many areas of ones life, but in general, filing for bankruptcy doesnt interfere with eligibility to receive federal aid.
It can, however, affect eligibility for some student loans and loan programs, but it might not be as bad as you think.
A green light for financial aid and federal loans
A parents bankruptcy has no direct impact on their childs eligibility for federal student aid. Even if their parents have a bankruptcy , a child remains eligible for federal student loans. An example is the Stafford loan which does not depend on the borrowers credit history in any way.
The Bankruptcy Reform Act of 1994 amended the US Bankruptcy Code to make sure government student grants and loans couldnt be denied based solely on the students or borrowers filing of a bankruptcy. The only exception is the Federal PLUS loan.
PLUS loans not so much
Direct PLUS loans are federal loans that parents of dependent undergrad students can use to help pay for college. The U.S. Department of Education is the lender, and they conduct credit checks, so those with an adverse credit history are not eligible.
Adverse credit history can be defined as having had a bankruptcy discharge, foreclosure, repossession, tax lien, wage garnishment or default determination in the last 5 years, or current delinquency on any debt of 90 days or more. Parents remain ineligible for 5 years from the date of the bankruptcy discharge.
The good news
Turns Out Bankruptcy Can Wipe Out Student Loan Debt After All
Jan 22, 2020 But when it comes to trying to get their student debt forgiven, more than 99% of the student loan debtors in bankruptcy just give up without
May 8, 2021 Its very unlikely. Discharging your student loans through bankruptcy requires proving to the court that you would suffer from undue hardship
Jul 28, 2021 How to Get Student Loans Discharged in Bankruptcy · Repaying student loans prevents you from maintaining a minimal standard of living for you
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Common Types Of Student Loans
The answer to whether youll be disqualified for student loans depends on which type of loan youre pursuing. Some of the most common types of student loans include:
- Perkins Loans These are low-interest federal loans meant for low-income graduate and undergraduate students. In 2014, Perkins loans were capped at $27,500 for undergrads and $60,000 for grad students.
- PLUS Loans These are federal loans meant for grad students and the parents of undergraduates. These loans come from the U.S. Department of Education, and are capped at the total cost of attendance .
- Private Loans Private loans come from lenders like banks and credit unions.
- Stafford Loans These are federal loans. Subsidized Stafford loans are meant for undergrads, while graduate students must take out unsubsidized Stafford loans. Students apply for Stafford loans by completing and submitting FAFSA .
Perkins loans and Stafford loans are based on financial need, not credit history, which means that prior bankruptcies will not have any impact on loan eligibility. Unfortunately, the same cannot be said of private loans and PLUS loans.
Can Student Loans Be Discharged In Bankruptcy
If you want your student loans and other debts discharged outright, youll need to file a Chapter 7 bankruptcy. But keep in mind theres no guarantee your student loans will be discharged unless certain other criteria are met. If you dont qualify to file Chapter 7, you may be able to restructure your student loan payments or have them discharged in a Chapter 13 bankruptcy. Once your Chapter 13 bankruptcy ends , youll be responsible for repaying your federal student loans if you werent able to prove undue hardship.
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So What Really Constitutes Undue Hardship
Those cases where borrowers have succeeded in having their student loans discharged are insightful. Specifically, a court might agree that repaying your loans would be an undue hardship if you cant maintain a minimal standard of living for yourself and any dependents, if the hardship will continue throughout the loans repayment period, and if youve sincerely tried to repay your loans before filing bankruptcy.
What does a court consider a minimal standard of living? Again, case law and some common sense can be a guide. It might mean:
- Your income has been below the federal poverty level for several years and doesnt show signs of improving.
- Youre on public assistance or dependent on a family member.
- You have a debilitating mental or physical illness or permanent injury.
- You have a child with a serious illness who requires round-the-clock care.
- Divorce reduced your family income with no hope of it returning to its previous level.
- Disability checks are your only source of income.
- You depend on public assistance to support your children.
- You support a spouse who was seriously and permanently injured in a car accident or who has developed a total disability.
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.
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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.
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.
How Is A Co
If you took out student loans with the help of a co-signer, theyll be impacted by your bankruptcy, too. Having loans discharged in bankruptcy only eliminates your responsibility to repay the debt, not the co-signers. However, a Chapter 13 bankruptcy has a special provision that can protect co-signers.
Consider Hiring A Lawyer
While you dont technically have to go through a lawyer when filing bankruptcy on student loans, bankruptcy can be an incredibly complex process. It requires determining which type of bankruptcy youll file for and submitting an extra lawsuit, called an adversary proceeding . Going through it all alone could mean extra time, incorrect filings and, possibly, a lost case.
However, one thing to consider is that hiring a student loan lawyer could actually hurt your chances for discharging your student loans in bankruptcy, according to Fuller. Thats because some judges may feel that if you can afford fees for an attorney, then you can afford to be paying back something on your loans, which would disqualify you from experiencing undue hardship.
If you dont know a lawyer, dont worry. You can find one through the American Bar Association. You might be eligible for a lawyer at no cost to you through the Legal Services Corporation, an independent nonprofit created by Congress that offers financial support for civil legal aid to low-income Americans. Just make sure you pick a lawyer that specializes in bankruptcy and has very good reviews.
If you opt to handle your case yourself, a recent study by the American Bankruptcy Journal noted that debtors without a lawyer were just as likely to have their student loans discharged by a bankruptcy judge as those who worked with an attorney.
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