What Is Chapter 7 Bankruptcy
In Chapter 7 bankruptcy, your nonexempt assets may be liquidated , to pay your creditors. Unsecured debt, like credit card debt, is usually discharged in the bankruptcy. Remember… Read more >
In Chapter 7 bankruptcy, your nonexempt assets may be liquidated , to pay your creditors. Unsecured debt, like credit card debt, is usually discharged in the bankruptcy. Remember, student loans are not automatically discharged under your general bankruptcy discharge order. So, unless you file an adversary proceeding in which the bankruptcy court concludes you met the undue hardship standard, your student loan will remain a debt you must repay following bankruptcy.
How Do I Challenge My Student Loan Debt In Bankruptcy
Once you have filed for bankruptcy or we have re-opened a prior bankruptcy, the next step to discharge student loans in bankruptcy is to file a separate action within the bankruptcy case, known as an adversary proceeding. This adversary proceeding is similar to a lawsuit in that it will start with the filing of a complaint and can proceed through a trial and appeal, if necessary.
This process, within a bankruptcy, can be very difficult and our highly specialized student loan lawyers are some of the few attorneys that understand how to best proceed with challenging student debt through an adversary proceeding.
What Does Chapter 7 Do
The overwhelming majority of bankruptcy cases are filed under Chapter 7 of the Bankruptcy Code. The actual percentage of cases that are filed as Chapter 7 cases is around 95% in most jurisdictions, including San Diego. Chapter 7 gets right to the heart of bankruptcy relief for the average person. Lets take a look at why thats the case.
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Is There Anything I Can Do To Get My Student Loan To Be A Dischargeable Debt
You can file a separate “adversary proceeding” with the bankruptcy court. The purpose of the adversary proceeding is to prove “undue hardship.” Please consult with a bankruptcy attorney to… Read more >
You can file a separate “adversary proceeding” with the bankruptcy court. The purpose of the adversary proceeding is to prove “undue hardship.” Please consult with a bankruptcy attorney to discuss your options. Learn more >
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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The Automatic Stay Stops Creditors
The filing of your Chapter 7 bankruptcy case creates an immediate injunction that the bankruptcy law calls the automatic stay. It is found in the law at Title 11, United States Code, Section 362. It stops all forms of creditor collection activity including foreclosures, lawsuits, phone calls and letters to collect debts, wage garnishments, auto repossessions and so on. Everything stops.
This automatic stay is designed to allow all or virtually all of the claims against you to be handled in one place: the Bankruptcy Court. It stops all creditors from trying to enforce their claims and instead to bring their claims to the Court you have chosen to be resolved. And in most cases, creditors claims are resolved when they Trustee reports that you have no available assets for paymentso claimants receive nothing and must move on to bothering other people.
There are some limited exceptions when the automatic stay may not apply and you can discuss these with your lawyer so that you know how a Chapter 7 bankruptcy filing will actually affect you. One limited example of a court proceeding outside of bankruptcy that might not be stopped is a child custody proceeding. But for the most part, your financial life will suddenly get simple and the stress will disappear because of the automatic stay.
How Does A Chapter 7 Bankruptcy Work
CHAPTER 7 OVERVIEW
A chapter 7 bankruptcy is a popular type of bankruptcy because it is quick and discharges most debts. Chapter 7 bankruptcy cases are typically less expensive than a chapter 13. Additionally, a majority of chapter 7 bankruptcies are no asset bankruptcies, meaning most of the debtors assets are protected by state or federal law and there arent any unprotected assets the trustee is interested in taking and selling for creditors. The entire process for a no asset case typically takes around 4 months. Upon completion, the debtor is afforded a fresh start where the debtor is enabled to get rid of unwanted debt such as credit card debt, pay day loans, medical debt, and other unsecured short-term loan debt and even some old individual tax debt.
Most debtors can have their credit score to a good number within about two years after the bankruptcy case is completed. Surprisingly, it is also not uncommon for debtors to be approved for a mortgage loan about two years after their case has been completed.
If a debtor has filed for chapter 7 bankruptcy within the past eight years and they received a discharge in their previous case, they will not be eligible to file another chapter 7 bankruptcy until the required eight years have passed.
A husband and wife are permitted to file a joint petition.
MEETING OF CREDITORS
CHAPTER 7 DISCHARGE
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Inability To Maintain A Minimal Standard Of Living
Terms such as âminimal standard of livingâ are quite subjective. What is considered minimal for one person, could be luxury for another. How does the court determine if you are unable to maintain a minimal standard of living, and off what are they basing that standard?
The bankruptcy judge will first review your financial situation, including monthly income, whether you are employed or self-employed, and the amount of your take home pay. Fixed expenses, such as rent and car payments, and variable expenses, such as utilities and groceries, will be considered next. Non-essential luxuries, including cable and fitness memberships, will be frowned upon. The court wants to see that you are doing everything possible to cut unnecessary expenses and maintain a minimal standard of living. And while making car payments is essential to get you to and from work, saving up for a brand new car would not qualify as minimal living.
Home Mortgage And Other Property Liens
If you have a lien on property, such as a home mortgage, you cannot have the mortgage discharged in bankruptcy.
State laws vary, but you can generally keep your home in bankruptcy if you keep making the payments and if you do not have more equity in the home than you are allowed to keep by state law.
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Likelihood Of Discharging Student Loans
Why Is It So Difficult To Discharge Student Loans?
In 1976, Congress prohibited federally guaranteed student loans from being discharged in bankruptcy except under conditions of undue hardship. This was in response to largely unfounded fears of too many student debtors looking for an easy way out of their obligations.
This put student loan debt in the same category as financial obligations like child support, alimony and criminal fines.
In 2005, Congress added private student loans to the list of debts that cannot be discharged.
In most bankruptcy cases, consumers dont even attempt to have student loans discharged. Instead, their lawyers focus on other issues such as .
Austin said that less than 1% of bankruptcy filings include student loans, even when there is a compelling case. He cited a situation in which a single mother on a teachers salary and battling cancer didnt bother filing for bankruptcy, despite more than $150,000 in student loan debt.
However, in most cases, the legal hurdles that have to be overcome are so daunting that most lawyers advise their clients not to seek a discharge for student loan debt in their bankruptcy filing. Also, there are now several income-driven repayment plans such as Pay As Your Earn , Repay As You Earn , Income Contingent Repayment and Income Based Repayment that most borrowers should be able to find a program they can afford.
Surprisingly, about 40% of the cases that are filed, actually are successful.
Are Private Student Loans Now Dischargeable
Media coverage of recent rulings from bankruptcy judges would lead you to believe that private student loans are now dischargeable. Thatâs not entirely accurate.
While there have been major rulings over the past few years that made some education loans made by some private lenders dischargeablein some places, thatâs not true in all bankruptcy courts across the United States.
Most people who file bankruptcy with education loans made by a private lender will still need to file a separate bankruptcy proceeding to let a judge decide their eligibility for discharge.
Circuit Courts that have ruled that private student loan debt was discharged:
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Disadvantages Of Chapter 7
- Chapter 7 bankruptcy can remain onyour credit reports for up to 10 years, affecting your credits
- A whole lot of your properties aretaken from you
- Your luxurious possessions can betaken too
- Getting a mortgage becomesdifficult
- Chapter 7 can only be filed onceevery 6 years
- The court can decisively convertyour chapter 7 to chapter 13, which is a heavier one
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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Chapter 7 Bankruptcy Student Loans
Nearly all debtors do not have the authority to discharge a student loan debt. However, you can experience this benefit by proving that repayment of a student loan would cause hardship. It is possible that an agent can get rid of this debt in a chapter 7 bankruptcy.
Myth #1: No courts allow student loans to be included in a legal proceeding.
According to the Law Offices of James C. Shields, many courts base their qualifications using the Brunner Test to demonstrate undue hardship. If an individual has a low income or a loan is from a for-profit school, a person increases their chance to include this debt.
Another qualification is to allow an individual to show proof of their current income and provide a list of expenses that demonstrates why an individual cannot maintain a quality standard of living. This financial situation of poverty will more than likely continue during the repayment period. A good faith effort has been made to repay their student loans.
Myth #2: The standards listed for Undue Hardship make it burdensome for many people.
Consumers who were able to discharge their student loans had these three characteristics:
1. A person is less likely to get hired for a job.
2. A medical hardship will happen in the future.
3. The year before a person filed for a bankruptcy their annual income was low.
Myth #3: Most people do not have their student loan debt discharged.
If you need a bankruptcy attorney, contact us today and request a free consultation.
Should You Still File
Upon hearing that its very difficult to get student loans discharged through bankruptcy, many debtors simply give up. They think there is no point in filing for bankruptcy if its not going to discharge their student loan. This isnt true, though.
When debts continue to pile up and a persons income is not enough to fully cover those debts and still allow them to enjoy a reasonable standard of living, bankruptcy is often the answer. Even though bankruptcies dont discharge every type of debt, they still eliminate a lot. When those debts are discharged, individuals often find the burden of their student loan, and other non-dischargeable debt, much easier to handle.
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If Youre Drowning In Student Loans With No Solution In Sight You Might Have Considered Declaring Bankruptcy
Unfortunately, discharging student loans in bankruptcy can be one of the most challenging tasks in whats already a complicated legal process. Still, trying to get rid of student loans in bankruptcy can make sense for some borrowers. If you think it might be worth the effort, heres what you should know before getting started.
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.
Heres 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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What Is Chapter 13 Bankruptcy
A Chapter 13 bankruptcy does not liquidate your assets, but it does require you to repay all or a portion of your debts in installments specified by a court-approved bankruptcy plan… Read more >
A Chapter 13 bankruptcy does not liquidate your assets, but it does require you to repay all or a portion of your debts in installments specified by a court-approved bankruptcy plan.
If you successfully complete your Chapter 13 bankruptcy plan, the court discharges most or all of your remaining unsecured debt. Remember, like a Chapter 7, your student loan is not automatically discharged under your Chapter 13 general bankruptcy discharge order. So, unless you file an adversary proceeding in which the bankruptcy court concludes you met the undue hardship standard, your student loan will remain a debt you must repay following bankruptcy.
Have You Considered Other Repayment And Forgiveness Options
Can you file bankruptcy on student loans? Maybe. Should you? That depends on your personal situation.
Filing bankruptcy on student loans is a complicated, intrusive and extensive process. In fact, Fuller advised not doing it at all if you can. It should be a last resort, he said.
There are many alternative solutions to filing bankruptcy on student loans. For example, federal loans come with options such as income-driven repayment plans and deferment or forbearance. These programs could provide relief without the extreme step of bankruptcy.
You also have the option to apply for forgiveness, either through an income-driven repayment plan or Public Service Loan Forgiveness . PSLF is available to those who work for certain public service organizations, such as government agencies or nonprofits.
And if you have private student loans, talk to your lender. They might have a hardship program for student loans that you didnt know about. Fuller suggested sending to your private loan servicer a letter via certified mail outlining your financial hardships, your income and how much youre able to pay. Your servicer may respond with a repayment plan that provides some relief. After all, you dont lose anything by asking.
Before filing bankruptcy on student loans and trying to fight against a system that makes it difficult to discharge your debt, be sure to research your other debt repayment options for student debt relief.
Andrew Pentis and Alli Romano contributed to this report.
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Does The Coronavirus Outbreak Affect How The Brunner Test Works
The short answer is no, at least not yet. In the United States, the coronavirus pandemic has resulted in some new legislation related to student loan relief, but nothing specific to bankruptcy dischargeability.
The President signed the CARES Act into law on March 27, 2020, providing an automatic administrative forbearance for individuals with federal student loans. Essentially, the CARES Act pauses student loan payments between March 13, 2020 and September 30, 2020.