When To File An Adversary Proceeding
After you file bankruptcy, the next step to get a student loan discharge is to file an adversary proceeding. An AP is what lawsuits are referred to as in bankruptcy proceedings.
A borrower or cosigner can start the student loan bankruptcy process by filing an adversary proceeding asking the bankruptcy judge to discharge federal loans or private loans due to undue hardship.
Chapter 7 bankruptcy cases are over with quickly . As a result, you may need more time to give yourself a better chance of getting a discharge. Fortunately, Federal law does not set a deadline for filing an adversary to discharge student loans. So can file the AP before or after your case closes.
Chapter 13 cases take 3 to 5 years to complete. You don’t receive a discharge until after you made your final payment under your plan. Consequently, different jurisdictions may force you to wait until your Chapter 13 is almost over before they’ll let you file an adversary proceeding.
What To Know About Bankruptcy
There are two types of bankruptcy: Chapter 7the most commonand Chapter 13. In both cases, if youre successful in filing, you wont have to repay certain debts, and wage garnishment and other debt collection activities will end.
Chapter 13 bankruptcy gives filers who have a consistent income a payment plan to pay off debts within three to five years. The remaining debt is discharged after that time. Under Chapter 7 bankruptcy, theres no payment plan, and discharge can happen sooner, but your eligible assets will be sold to pay off your debts. After that, any remaining debt will be discharged.
In both cases, theres a downside: The bankruptcy will appear on your credit report for 10 years if you file for Chapter 7 and seven years if you file for Chapter 13. And unless you choose Chapter 13, you might also lose the collateral you put up to back secured debt, like a mortgage, that hasnt been paid and has a lienor a legal claimagainst it.
Student Loan Bankruptcy: The Process
For many people, student debt is the one debt they can’t seem to overcome no matter what they do. They’ve made payments when their financial situation allowed. Asked for deferments and forbearances when they couldn’t. They’ve applied for loan forgiveness and lower interest rates. And they’ve even asked for options to reduce their outstanding student loan debt via settlement.
Nothing has worked thus far.
It’s at that point that filing student loan bankruptcy becomes an option.
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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.
Debts That Are Difficult To Discharge In Bankruptcy
Student loans are notoriously difficult to discharge through bankruptcy it is only possible if you can demonstrate undue hardship to yourself or your dependents, such as being unable to maintain a minimal standard of living. In some cases, a court may discharge part, but not all, of your student loan debt. If student loan debt is a major reason for your considering bankruptcy, contact your loan servicer first and see if itâs possible to negotiate a repayment plan that would work for you. In the case of federal student loans, for example, several repayment plans are available.
You cannot have income tax debts discharged without a special exemption, which can only be obtained by petitioning the bankruptcy court and explaining why you deserve relief. So if you have income tax debts that you cannot repay, then you may be better off consulting with a tax attorney to discuss your options before filing for bankruptcy.
In the case of federal taxes, for example, the Internal Revenue Service can offer several alternatives to people who are unable to pay what they owe. One is an offer in compromise, in which the IRS agrees to accept a lesser amount. The IRS may also arrange for a payment plan, or an installment agreement, that will allow you to pay your taxes over an extended period of time.
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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.
How To Demonstrate Undue Hardship
“Bankruptcy discharge of student loans is very rare, but not completely impossible,” Kantrowitz adds.
According to Kantrowitz, these are some circumstances in which borrowers have been able to demonstrate “undue hardship:”
- The borrower is disabled, but the private student loan does not offer a disability discharge.
- The borrower has a disabled dependent, which affects the borrower’s ability to work full time while caring for the dependent, or where the cost of caring for the dependent yields a higher minimal standard of living.
- The borrower has very low income and limited prospects for increasing income.
- Alimony and child support obligations reduce the borrower’s net income, affecting the ability to maintain a minimal standard of living while repaying the student loan debt.
- The borrower has a high cost of living due to where they are living , which affects the minimal standard of living threshold.
- The college degree was worthless and does not enable the borrower to earn enough to repay the debt.
- The amount of debt is excessive compared with the borrower’s income, making it difficult to repay the debt. For example, a grandparent cosigned a private student loan for a grandchild and is now retired on fixed income.
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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.
Preparing For The Adversary Proceeding
The court will look at a number of factors in determining undue hardship. One factor it will likely consider is whether you made a good-faith effort to repay your loans. That good-faith effort may include trying to rearrange your payment schedule. If you havent already, contact your loan servicer and ask about alternative payment plans. You could end up reducing your monthly payment amount or even postponing making payments altogether.
If your lender refuses to adjust or pause your payments, document whom you spoke to and the date and time of the call. You might need to use this information as evidence in court.
You may also need to present information on your income, budget and debt burden during the adversary proceeding. In most cases, youll have already collected this material as part of the overall bankruptcy filing process.
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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.
Debt Relief Alternatives To Bankruptcy
Bankruptcy has serious consequences. A Chapter 7 bankruptcy will remain on your for 10 years, and a Chapter 13 will remain for seven years. That can make it more expensive or even impossible to borrow money in the future, such as for a mortgage or car loan, or to obtain a credit card. It can also affect your insurance rates.
So itâs worth exploring other types of debt relief before filing for bankruptcy. Debt relief typically involves negotiating with your creditors to make your debts more manageable, such as reducing the interest rates, canceling some portion of the debt, or giving you longer to repay. Debt relief often works to the creditorâs advantage, too, as they are likely to get more money out of the arrangement than if you were to declare bankruptcy.
You can negotiate on your own or hire a reputable debt relief company to help you. As with , there are scam artists who pose as debt relief experts, so be sure to check out any company that youâre considering. Investopedia publishes a regularly updated list of the best debt relief companies.
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How Current Student Debt Is Handled In Chapter 13 Bankruptcy
Will declaring bankruptcy cancel out my accumulated student debt? Most current student loans are not dischargeable in the Chapter 13 bankruptcy process. If you qualify for Chapter 13, an automatic stay is put in place to protect you from credit collectors. Then, debt is bundled together and a repayment plan is set up to help you successfully work towards completion. When the repayment plan is complete , most nonpriority unsecured debt is discharged.
Though both federal and private student loans are considered nonpriority student debt, they are not automatically discharged through bankruptcy. The only way these loans can be discharged is by proving to the bankruptcy court that repayment would cause you undue hardship. This term describes a situation in which the debtor:
- Has already made a strong effort to pay back the student loan before filing for bankruptcy.
- If forced to repay the debt, could not sustain a minimal standard of living.
- Would struggle financially for an extended amount of time during the repayment period.
Proving undue hardship is extremely difficult and bankruptcy judges rarely grant this type of relief. Thats why, for most cases, student loans are considered non-dischargeable.
When Bankruptcy Doesnt Discharge Student Loans
Even if bankruptcy cannot discharge your student loans, it may still be the right option for you.
People struggling with student loan debt often have additional outstanding debts ranging from credit card debt to unpaid mortgages. Bankruptcy can discharge these other debts, freeing up more funds to pay down your student loans.
If you borrow money, you have a moral and legal obligation to pay that money back. Students and parents should take the time to do cost-benefit analysis and long-range planning before accepting student debt of any amount.
But remember that bankruptcy laws were written to give people a second chance. If your debt load is overwhelming and you dont see a reasonable way out, bankruptcy is a legitimate debt-relief option. Even if you dont meet the criteria for student loan discharge, it might be possible to discharge other debts, freeing up resources to allow you to pay the student loans.
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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.
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.
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Seven Year Rule Or Waiting Period
Section 178 of the Bankruptcy & Insolvency Act in Canada specifically excludes government guaranteed student loans if you have been a full or part-time student any time in the past seven years. To put it simply, if you have been out of school for more than seven years your student loan debt will be eliminated if:
- you or
- if you make a debt proposal to your creditors through a consumer proposal.
If it has been less than seven years since you were a student, your government guaranteed student loan will not be automatically discharged through a bankruptcy or a consumer proposal.
If you have been out of school for 7 years your student loans are eliminated when you claim bankruptcy. You are no longer obligated to pay your student loans. If you have not been out of school for 7 years, you can stop making payments during your bankruptcy or proposal but will be required to start making payments again once you are discharged.
What if I have more debts than just my student loans? If you have other significant debts like credit card debts, lines of credit or payday loans, a bankruptcy or consumer may still be a good option even if you dont meet the waiting period. Filing bankruptcy can help clear other debts and make repaying your student loan more manageable. We know this can be confusing. Our Licensed Insolvency Trustees will discuss the treatment of your specific student loans during your free consultation before you file.
Can Student Loans Be Discharged Under Chapter 7
You may be able to have your student loans discharged under Chapter 7 bankruptcy, but the terms under which this could occur can only be decided in bankruptcy court. Chapter 7 bankruptcy is more likely to work in cases of extreme undue hardship where it would be impossible for the applicant to repay their loans under any repayment plan.
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File For An Adversary Proceeding
Once youve officially filed for bankruptcy, youll need to file an adversary proceeding for your federal student loans. The adversary proceeding states that your student loan debt causes undue hardship, said Matthew Alden, a bankruptcy and debt relief attorney at Ohio-based Luftman, Heck & Associates LLP, in an email to The Balance. Once its filed, youll have to provide evidence of the hardship in court. The same appears to apply to those seeking to discharge private student loan debt, although they would need to prove that their loans did not constitute an educational benefit, as per the recent Second Circuit ruling.