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Does Chapter 7 Bankruptcy Cover Student Loans

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Student Loans & Chapter 7 Bankruptcy

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Chapter 13 Bankruptcy Automatic Stay In Athens And Ga

During the aforementioned protected repayment plan, Section 362 of the Bankruptcy Code, also called the Automatic Stay, usually shields debtors from adverse creditor actions, such as:

  • : Student loan lenders are notorious for their itchy trigger fingers in this area. If one payment is late past the grace period, a series of escalating threatening letters start pouring in. Usually, these lenders can legally even send text messages to your phone.
  • Collection Lawsuits: Banks which issue student loans already have a number of collection tools. Once they obtain judgements, their toolboxes get bigger. These lawsuits are almost impossible to defend, but they are easy to stop. A simple bankruptcy filing triggers the Automatic Stay.
  • Wage Garnishment: This collection method is usually the go-to option for student loan lenders. Usually, these banks dont need court order to garnish up to 25 percent of your current wages. That amount of garnishment makes it very difficult to pay regular bills, including student loan payments. So, the downward spiral continues.

The Student Loan Crisis In The United States

The student loan crisis has been well documented in the media. Many graduates leave school with more debt than they can pay, especially since recent graduates must usually take entry-level jobs. Yet despite the magnitude of this problem, the Eleventh Circuit, which includes Georgia, continues to make it very difficult to discharge student loans in bankruptcy. More on that below as well.

Largely beginning in the run-up to the 2020 elections, many lawmakers started pushing for student loan forgiveness. So far, these efforts have basically gone nowhere. That could be because a student loan forgiveness program is already available.

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Filing Documents For Student Loan Oriented Chapter 13 Bankruptcy

Bankruptcys legal paperwork is extensive, to say the least. It is much bigger than a tax return. Its almost like filing tax returns for everyone in the neighborhood. Fortunately, an Athens bankruptcy lawyer streamlines this process. Additionally, when an experienced attorney handles the filing, there is almost no chance that a document will be omitted by mistake. Such omissions usually mean a costly delay at best, and a bankruptcy fraud prosecution at worst.

Normally, pro se debtors must go to the courthouse during business hours and file paper documents. Athens bankruptcy lawyers have unlimited access to the courts Electronic Case Filing system. For filing purposes, and many other purposes, an attorneys laptop is the bankruptcy courthouse. Its open when a lawyer says its open.

Think You Can File For Bankruptcy And Shake That Student Debt Think Again

Does Chapter 13 Bankruptcy Cover Student Loans?

U.S. borrowers owe a collective $1.59 trillion in student loans, and if you’re one of them, you may be struggling to keep up with your monthly payments. In fact, you may be so burdened by that debt that you’re actually contemplating filing for bankruptcy in an effort to shed it for good.

But not so fast — although filing for bankruptcy can help you wipe away certain types of debt, student loans are rarely dischargeable in a bankruptcy filing. Here’s why.

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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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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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Government Versus Private Loans

The federal government is the lender for a significant percentage of student loans. However, private financial institutions, such as banks, also offer loans to students, primarily because many students cannot fund their entire education without such supplementation. It doesn’t matter whether you have a government or a private student loan. To discharge either in bankruptcy, you must show that repaying the loan would cause undue hardship.

Does Filing For Bankruptcy Cover Defaulted Sallie Mae Student Loans

Student Loans in Bankruptcy

If you come to the point that you can’t pay your debts as they come due, filing for bankruptcy may be an option to solve your problem. By doing so, you can discharge many of your unsecured debts. However, barring extreme circumstances, you can’t discharge defaulted Sallie Mae student loans through bankruptcy. You can only discharge student loans by showing you’ll suffer undue hardship by making payments.

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Families Not Just Students Feel The Weight Of The Student Loan Crisis

For those who do try, though, Iuliano’s research finds that about half the time the person gets some or all of the student loan debt erased. One study he did found that they got help through bankruptcy about 40% of the time. And he says more recent data from this past year show that figure rising to more than 50% of the time.

“So I think that’s really important for bankruptcy attorneys to see that there are judges out there who are willing to grant undue-hardship discharges and that people are much more likely to obtain relief in bankruptcy for their student loan debt,” Iuliano says.

Just this month, a federal judge in New York discharged more than $220,000 in student loans for a borrower. In her ruling, Chief Bankruptcy Judge Cecelia Morris criticized the fact that even many lawyers “believe it impossible to discharge student loans.” She added, “This Court will not participate in perpetuating these myths.”

Robert Lawless, a law professor at the University of Illinois, says, “I think we’re reaching a tipping point with what the bankruptcy courts are doing.” He says he hopes more people are able to get help through bankruptcy.

What Are Alternatives To Bankruptcy For Student Loans

About 250,000 student loan borrowers file for bankruptcy annually, according to academic research from Villanova University but perhaps you shouldnt be among them.

Before filing for bankruptcy, find out if youre eligible for these alternatives for your student loans:

Rather than filing for bankruptcy, getting an income-driven repayment plan or requesting a temporary stop to payments could help you get back on your feet.

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Student Loans In Bankruptcy

There are a lot of myths and misconceptions about whether you can discharge student loans in bankruptcy. Many people believe that you cannot discharge student loans in bankruptcy. Further, many bankruptcy attorneys will not even attempt to have discharge student loans in bankruptcy. This is where our experienced student loan lawyers come in.

The truth is you can discharge student loans in bankruptcy. The process can be difficult, but the possibility of a discharge should not be ignored any longer. Only 0.1% of people with student loans in bankruptcy even ask to have their student loans discharged. Of those that do, nearly 40% are successful, according to a 2011 study.

The myth that you cannot discharge student loans in bankruptcy has continued to grow over the years. According to one bankruptcy judge, the undue hardship standard has become a quasi-standard of mythic proportions so much so that most people believe it impossible to discharge student loans in bankruptcy. Thankfully, the judge went on to say that she will not participate in perpetuating these myths.

If youre curious about your loans, we offer a FREE student loan discharge analysis. Just answer some questions about your loans and our student loan attorney can analyze whether your loans may be dischargeable in bankruptcy!

How To Get Student Loans Discharged In Bankruptcy

What Debts Can Be 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.

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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.

Things To Consider When Filing Bankruptcy While Unemployed

While there is no bar to filing Chapter 7 while unemployed you should be thoughtful about your timing. Specifically, consider how long have you been unemployed and how much longer do you think it will last? If it is very recent and you were making good money before you might not immediately qualify for a Chapter 7 bankruptcy based on your prior income level. If you canât reasonably predict how long you will be unemployed you might consider several things – is there another job on the horizon? Do you work in an industry where there is a great need and you can usually find a new job pretty quickly? Or was the loss of your job due to an injury or illness that will require some time to heal? If so, are you still facing more medical bills? A bankruptcy will only assist with existing debt, so if you are facing some large expenses you may want to wait to file.

Also keep in mind when you file bankruptcy with no money that your CMI is based on your average income over the last six months. This means that you may need to wait a little while to have your CMI average qualify you r a Chapter 7 bankruptcy. Even though the difference between your prior income and unemployment will feel very drastic immediately, it may not appear that way when averaged over the previous six months. Waiting an additional month or two to file will help your current monthly income to better reflect your current circumstances.

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If You Ignore Your Debts

Ignoring your student loan debts is the worst option. Once youre in default on government-held loans which accounted for 90% of all student loans in the 2016-2017 school year the federal government has extraordinary collection powers. It can garnish wages, seize tax refunds or portions of Social Security benefits, and place liens on bank accounts and property.

And unlike other types of debt, there is no statute of limitations on federal student loans. That means that a student loan debtor can be hounded to the grave by the federal bureaucracy or the agency that services loans on behalf of the Department of Education.

Also, after a stipulated number of months of non-payment, a loan can be transferred to a private collection agency. Additional fees and collection costs are then added to the loan balance.

Rather than trying to ignore your student debt problem, its best to take action as soon as possible, even if that means going into bankruptcy.

How Student Loan Bankruptcy Works

Bankruptcy & Student Loans: Breaking Down the Process

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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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.

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.

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.

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Lawmakers Call For Investigation After Npr Report On Troubled Student Loan Program

Iuliano says the outcome and how much student debt is forgiven, if any, can have a lot to do with what particular judge you end up with and what the rules are in that bankruptcy district.

Some of that is because of the language of the original statute stating that student loan borrowers have to meet a threshold of “undue hardship,” he says. Iuliano says Congress has never defined what that means, so a lot of discretion is left up to the courts and the particular judge you get.

Harrison Wadsworth, a consultant for the Consumer Bankers Association, notes that most student loans are issued by the government. But for loans from private lenders, he says relaxing the bankruptcy rules to make it easier to reduce or eliminate student debt could push up interest rates. “Lenders would have to be careful about making loans and probably have to charge more for them,” Wadsworth says.

Lauren eventually found a lawyer who took her case and charged her about $3,000, doing some of the work pro bono. And going through bankruptcy, she got her debt reduced from about $200,000 to around $100,000, with the bulk of that reduced to a 1% interest rate.

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