Statute Of Limitations And Student Debt
Do student loans ever go away? Unless you qualify and file for formal loan forgiveness through a bankruptcy or proposal, the student debt itself never goes away. Whether collection can be enforced depends on whether your creditor is the federal or provincial government or a private lender. Private student loans are subject to provincial statute of limitations laws. In Ontario, that means if there has been no activity on your student credit card or bank loan for two years, your defense to a lawsuit or wage garnishment action would be that the debt is too old. These same debts would fall off your credit report after six years. You will continue to receive collection calls during this time. Government Student Loans are not subject to a limitation period for collection action. The only way to stop paying government student loans in Canada is to file a bankruptcy or consumer proposal. For example, in Ontario if you owe money to the Ontario Student Assistance Program , CRA will continue all possible collection actions until your OSAP loan is discharged through the Bankruptcy & Insolvency Act or paid in full.
How To Use Chapter 13 To Manage Student Loan Payments
Even if you can’t use bankruptcy to eliminate your student loans, you might be able use Chapter 13 bankruptcy to reduce the amount you pay on your student loans for the length of your bankruptcy case, usually 36 to 60 months.
In Chapter 13 case, you get to keep your property. In return, you must devote your disposable income to the full or partial repayment of your unsecured debts over the life of your plan. In addition to unsecured debts, you can pay some secured debts like car payments, through the Chapter 13 plan, too.
You do this by making a monthly payment to your Chapter 13 trustee. The amount of this payment depends on the property you own, your income, and your reasonable and necessary expenses. Most filers must pay their “disposable income” toward unsecured debt for the repayment period. The trustee distributes this payment among your unsecured creditors, on a pro rata basis.
Example
Suppose you make $3,000 per month. Your costs for rent, car payment, utilities, food, and other expenses total $2,700 per month. That leaves a disposable income of $300. If you were not in Chapter 13, you would also be making payments of $400 in student loans and another $300 in credit card minimums and medical bills. You would be in the hole each month by at least $400.
Calculating your Chapter 13 plan payment is more complicated than the above example. Talk to a bankruptcy attorney to find out how much your Chapter 13 plan payment would be.
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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.
Stop A Foreclosure Repossession Or Eviction
The automatic stay will stop these actions as long as they’re still pending. Once complete, bankruptcy won’t help.
- Evictions. An eviction that’s still in the litigation process will come to a halt after a bankruptcy filing. But the stay will likely be temporary. Keep in mind that if your landlord already has an eviction judgment against you, bankruptcy won’t help in the majority of states. Learn more about evictions and the automatic stay.
- Foreclosure and repossession. Although the automatic stay will stop a foreclosure or repossession, filing for Chapter 7 won’t help you keep the property. If you can’t bring the account current, you’ll lose the house or car once the stay lifts. By contrast, Chapter 13 has a mechanism that will allow you to catch up on past payments so you can keep the asset. Find out more about bankruptcy’s automatic stay and foreclosure and car repossession and bankruptcy.
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When Are Education Loans Made By Private Lenders Dischargeable
Section 523 of the Bankruptcy Code protects three types of education debt from discharge:
If a loan meets one of those three requirements, you can get rid of it only if you prove you meet the undue hardship standard. Specifically, youâll have to show two things:
- you made a good faith effort to repay the debt
- your current and future financial situation doesnât allow you to maintain a minimal standard of living while making student loan payments throughout the repayment period.
However, not every private student loan meets the requirements to be excepted from discharge. Private student loans can be discharged without proving undue hardship if:
- a nonprofit did not back the loan
- the loan exceeded your cost of attendance
- the loan was not a conditional grant of money like an ROTC scholarship
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How To Prove Undue Hardship For Student Loans
To discharge student loans via bankruptcy, you will have to prove they pose an undue hardship during your adversary proceeding.
The U.S. Bankruptcy Code doesnt define undue hardship, so bankruptcy courts have different interpretations for its meaning. Most use whats known as the Brunner test to determine whether bankruptcy filers student loans meet the undue hardship standard.
You must prove that you meet all three parts of the Brunner test to get your college debt discharged:
1. Making student loan payments would keep you from maintaining a minimal standard of living based on your current income and expenses. To meet this, you generally must have bare-bones expenses and must have done everything in your power to increase your income, without success.
2. Additional circumstances make it very likely that your financial situation will persist for a significant portion of your remaining loan period. Among other things, you may be able to successfully meet this if you have a serious mental or physical disability, received a poor-quality education or have maximized your income potential in your field.
3. Youve made “good faith” efforts to repay your loans. You may meet this prong by making some loan payments, attempting to negotiate a payment plan and working to slash unnecessary expenses and increase income.
Different jurisdictions and judges have different interpretations of these standards so your outcome will depend on your location and the judge you get.
Do Student Loans Ever Go Away
Federal student loans will go away:
- after 10 years under the PSLF Program
- after 20/25 years of student loan payment under an income-driven repayment plan
- when you die or a parent dies
- for a disability discharge when you have a 100% permanent disability
- for borrowers who qualify for loan discharge programs like a Closed School Discharge or Borrower Defense to Repayment
- for educators who qualify for Teacher Loan Forgiveness
Federal student loans do not have a statute of limitations. Unless President Biden or Congress forgives federal student loans, you may end up paying your loans even after you retire and start drawing Social Security Benefits.
Likewise, there’s no loan forgiveness simply because you have a low income. However, you can try filing student loan bankruptcy and proving undue hardship.
Private student loans will go away:
- when you die
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Consumer Proposal: Student Loans
A consumer proposal is an option to negotiate repayment terms with your creditors through a Licensed Insolvency Trustee, for much less than what you owe today. Student loans can be included in a consumer proposal, and are eligible for release, if they meet the seven-year rule.
Stay of Proceedings When you file personal bankruptcy or make a consumer proposal, one of the major benefits is a stay of proceedings. This prevents your creditors from taking further action to collect on your debts, including student debt.
- If your debts are eligible for automatic discharge in a bankruptcy or release in a consumer proposal, then, once your bankruptcy or proposal is completed, your debts go away. No further payment is required.
- If your student debts are less than 7 years old however, your student loan lender, even the government, is still unable to collect while you are bankrupt or in a consumer proposal. You can opt to continue to make payments against your non-dischargeable student debt while in a consumer proposal. Many find this feasible since their credit card and other debt payments, have been eliminated. As long as your student loan lender files a claim in your consumer proposal, they will received their pro-rata share of the consumer proposal payments you make, like any other unsecured creditor. This dividend further reduces any student loan debt that remains upon completion of your consumer proposal.
Popular Misconceptions Theres Nothing You Can Do About Student Loan Debt
One of the biggest misconceptions about student loans is that it is impossible to have these loans discharged in bankruptcy, she points out.
Most attorneys will even tell you that. While the path to discharge is challenging, it is possible and I accomplished this for myself, she says, adding, Do not trust student loan resources, and even student loan lawyers, who tell everyone to forget about filing bankruptcy. Either they are poorly informed, or have an agenda which is not in the debtors best interest.
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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.
Wipe Out Credit Card Debt And Most Other Nonpriority Unsecured Debts
Bankruptcy is very good at wiping out unsecured , medical bills, overdue utility payments, personal loans, gym contracts. In fact, it can wipe out most nonpriority unsecured debts other than school loans.
The debt is unsecured if you didn’t promise to give back the purchased property if you didn’t pay the bill. By contrast, if you have a secured credit card, you’ll have to give the purchased item back. Jewelry, electronics, computers, furniture, and large appliances are often secured debts. You can find out by reading the receipt or credit contract.
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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.
How Do I Apply For Student Loan Forgiveness 2021
Your payments do not have to be in consecutive order, but they must be made on an income-driven repayment plan. In order to qualify, you must submit a Public Service Loan Forgiveness Employment Certification Form each year. Then at the end of 10 years, submit the formal Public Service Loan Forgiveness application
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Can You Negotiate Your Student Loan Debt
You may be able to settle federal or private student loans for less than you owe if theyre in default and you cant repay them. Student loan settlement is possible, but youre at the mercy of your lender to accept less than you owe. Dont expect to negotiate a settlement unless: Your loans are in or near default.
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.
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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.
Consider Consulting With An Attorney
You’ll find the Brunner test or other standards applied to Chapter 7 and Chapter 13 debtors in lots of court cases. Knowing how the court in your jurisdiction ruled previously could help you determine the likelihood of your success.
If you have a substantial amount of student loan debt, it might be worthwhile to consult with a local bankruptcy attorney. The chances are that if you decide to litigate either the dischargeability issue or assert a defense to the loan in bankruptcy court, you’ll need an attorney to represent you.
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How To Get The Ball Rolling Not A Slam Dunk
Natalie wants readers to understand this is not a slam dunk. First, you need to find a bankruptcy attorney who is familiar with the undue hardship rules, as many are not.
It is important to understand that you will be filing for bankruptcy, and, as you are claiming an undue hardship, this will be decided in what is called, An Adversary Proceeding in bankruptcy court. This is a real lawsuit, as the creditor wants to be paid and you are trying to demonstrate why the loan should be forgiven.
You will appear before a judge who will most likely use the Brunner Test to decide if you have an undue hardship.
If you can prove all three of these elements, you are entitled to a discharge, but youve got a lot of work to do, beginning with conducting discovery.
Be prepared to provide financial records, tax returns, bank statements showing your financial resources, proof of expenses, housing, utilities, food, etc. You will need to present a detailed picture of your financial life.
She also wants readers to understand that not all student loans are Qualified Education Loans.
For example, a private bank making a loan where the amount exceeds the published cost of attendance might not be a qualified loan and therefore is dischargeable without having to show undue hardship.
Her website is well worth the time for anyone facing crushing student loan debt.