Private Loan Modification Or Settlement
Your options to reduce private loan payments or get out of default vary greatly based on the lender. Communicate directly with your private lender or servicer to explore loan modification programs if you cant afford your payments long-term.
If youre behind on your loans, you could consider reaching a settlement agreement with the lender or collection agency. At which point, you would pay a lump sum settlement thats less than your total outstanding balance. But you may have to pay taxes on this amount, and it could be unaffordable.
If you can, consult a tax professional or lawyer with student loan expertise if youre in communication with a collection agency about a settlement.
Why Claiming Undue Hardship May Not Discharge Student Loans
You may have read that student loans may be discharged ng them would place an… Read more >
You may have read that student loans may be discharged when paying them would place an “undue hardship” on the borrower. But Congress intended that discharge for undue hardship be reserved for individuals facing more than the financial hardship that accompanies all bankruptcies. So while you may claim undue hardship based on any number of contributing factors, it is up to the bankruptcy court to determine if your situation meets the legal standard set by Congress. Please consult with a bankruptcy attorney to discuss your options.
What Is Student Loan Bankruptcy
You may have heard that student loans cannot be discharged in bankruptcy. That statement oversimplifies the truth. You actually can get student loans discharged in some cases, but the bar is higher, and the process is more burdensome than it is for other types of debt.
Filing for bankruptcy to discharge student loans may get easier, though, if a recently introduced bipartisan bill is passed. The Fresh Start Through Bankruptcy Act of 2021, by Senators Dick Durbin and John Cornyn , would restore the ability for struggling borrowers with federal student loans to seek a bankruptcy discharge for their loans 10 years after the first loan payment comes due.
It would also make it possible to retain the existing undue hardship discharge option for private student loans and for federal student loans that have been due for fewer than 10 years.
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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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Bankruptcy And Financial Aid
This page answers common questions about the relationship between bankruptcy and financial aid, such as student loans. The first answer concerns the impact of bankruptcy on eligibility for student loans. The second answer discusses whether student loans can be discharged through bankruptcy.
Thanks to Pat Somers of the Univ. of Arkansas at Little Rock and Art Bilski of the Illinois Student Assistance Commission for their assistance with this section.
Bankruptcy and Eligibility for Financial Aid
Will a bankruptcy affect a students future eligibility for student loans and other financial aid?
The answer to this question is a complex one because several issues are involved. It depends on the nature of the student loan programs and the type of bankruptcy.
Whatever the circumstances behind the bankruptcy, the student should talk with the financial aid administrator at the school he plans to attend, and explain the situation. The financial aid administrator may be able to guide the student to certain loan programs or lenders that may fit his needs.
Generally speaking, a bankruptcy should have no impact on eligibility for federal student aid.
The anti-discrimination rules appear in 11 USC 525:
Discharging Student Loans Through Bankruptcy
- if the borrower files an undue hardship petition
Types of Bankruptcies
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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When Did Private Student Loans Become Nondischargeable
While federal student loans have been nondischargeable in bankruptcy since 1976, private student loans didnât receive the same treatment until 2005. That year, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act to make it more difficult for borrowers to file for Chapter 7 bankruptcy and, instead, push more debtors to file Chapter 13.
As part of the Act, Congress amended 11 USC Â§ 523 to prevent the bankruptcy discharge of education loans that did not exceed the studentâs cost of attendance at certain higher education institutions. These types of debts are referred to as qualified education loans.
How to find out if you have private student loans? The easiest way to find out what type of student loans you have is to check your credit report against the loans the Department of Education shows you have with them. You can do that by creating an account with studentaid.gov. Any student loan you see on your credit report but not on the website is a private loan.
File For An Adversary Proceeding
Whether you hire a lawyer or go it alone, youll need to file for an adversary proceeding, which is a hearing to determine the possibility of discharging your student loan debt. Youll have a hearing in bankruptcy court and your creditors are required to be present. At that hearing, youll need to provide evidence that you qualify for undue hardship standards.
This is part of the process that is unique to bankruptcy and student loans. Note that you cant proceed with a student loan bankruptcy without this step.
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.
Will Student Debt Relief Help The Economy
Some economists argue that relieving student loan debt will help boost the economy. However, William Chittenden, an economist at Texas State University, writes that the economic benefits of canceling student debt might be modest at best.
If all US$1.5 trillion in federal student loans were forgiven, the average borrower would have an extra US$393 per month, Chittenden writes. It is estimated that the economy would only grow by about $100 billion, or about 0.5%
Chittenden argues that student debt relief should be targeted toward borrowers that typically owe less than $10,000 but who are more likely to default on their loans. Demographically, this would benefit people of color and women the most, since women on average owe more than two-thirds of outstanding student loan debt, and 85% of Black college graduates owe money on student loans, compared to just 69% of white college graduates.
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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.
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.
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Can Bankruptcy Get Rid Of Student Loans
Filing bankruptcy can allow you to eliminate debt and get a clean slate financially, either through a structured payment plan or a liquidation of your assets. Many types of debt can be discharged in bankruptcy, but student loans typically aren’t included on that list.
It is possible to include student loan debt in your bankruptcy filing and get it approved by the court if you can prove undue hardship, but that process can be difficult. If you’re struggling financially and are thinking about filing bankruptcy, here’s how to know if your student loans are eligible.
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.
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Student Loan Bankruptcy Hardship Provison
So what happens if you are really struggling and you feel your financial situation is so bad you just will not be able to pay back your student loan? If it has been five years or more since your ceased to be a student you may apply to have your student loans discharged in a bankruptcy under what is known as the hardship provision.
The court MAY order non-application of Section 178 if:
- At any time after five years after a bankrupt who has a debt referred to in paragraph ceases to be a full- or part-time student, as the case may be, under the applicable Act or enactment, the court may, on application, order that subsection does not apply to the debt if the court is satisfied that
- the bankrupt has acted in good faith in connection with the bankrupts liabilities under the debt and
- the bankrupt has and will continue to experience financial difficulty to such an extent that the bankrupt will be unable to pay the debt.
What this means is that you may apply to court to have your student loan reduced or discharged after five years. You must be able to satisfy the court that you have and will continue to experience undue financial hardship that will prevent you from paying back your student loans, that you have made all efforts to repay those loans including applying for repayment assistant programs and that you used your student loan money appropriately.
Student Loans And Bankruptcy
When one files for bankruptcy, the bankruptcy court may eliminate debts by “discharging” them. Debts that are non-dischargeable are those that generally cannot be eliminated through a bankruptcy filing and will need to be paid. For cases filed prior to October 17, 2005, a student loan may be dischargeable if the program under which your student loan was issued involved only for-profit, private entities. However, if the program is funded in whole or in part by non-profit institutions , the loan is not dischargeable in bankruptcy. For cases filed on and after October 17, 2005, and under current law, both federal and private student loans are not dischargeable in bankruptcy unless you can show that your loan payment imposes an “undue hardship” on you, your family, and your dependents. Historically, it has been very difficult to meet the requirements of “undue hardship.” Courts have generally disfavored discharge of student loans, but some courts will discharge part of a student loan if repaying it all would be an undue hardship. In order to have a student loan discharged on undue hardship grounds, you must file a separate motion with the bankruptcy court and then appear before the judge to explain your hardship.
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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.
Take Steps Early To Avoid Credit Damage
If you’re not sure you can make your student loan payments, take steps early to avoid missing payments and default. Both of these scenarios can damage your credit score, making it difficult to qualify for refinancing or get approved for favorable credit terms in the future.
As you decide the best path forward for you, monitor your credit regularly to understand how your actions impact your credit score. Credit monitoring can also help you spot potential issues before they cause significant damage.
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