Two: Student Loan Debt & Waiting Periods
If you owe monies on your student loans and you wait long enough, it is possible for you to eliminate this debt by taking advantage of either a consumer proposal or personal bankruptcy. If, however, you do not satisfy certain waiting periods under federal law, your student loan debt will survive your bankruptcy or your consumer proposal. Therefore, you must proceed very carefully when student loans form all or a part of your debt.
When we talk about student loans, two waiting periods are key to the timing of making a consumer proposal or filing for personal bankruptcy:
Canadas insolvency laws punish those with outstanding student loans who file for personal bankruptcy or make a consumer proposal within seven years of ceasing to be a student.
Does Bankruptcy Clear Student Loan Debt
Many people considering bankruptcy wonder Does bankruptcy clear student loan debt? Until recently, that answer was almost always no.
But a recent court ruling this past September could change how bankruptcy courts deal with student loan debt. The ruling comes from the US Court of Appeals for the 10th Circuit Court in the case McDaniel v. Navient and affirmed a lower courts decision to allow discharge of up to $200,000 in private student loan debt.
Bankruptcy Should Only Be Considered As A Last Resort
Bankruptcy will obliterate your credit score and remain on your record for as long as 10 years, severely limiting your ability to borrow money. If you file for Chapter 7, all of your possessions may be liquidated to pay your creditors. If you file for Chapter 13, youll be placed on repayment plan and may be allowed to keep your possessions. Either way, you wont be able to obtain new lines of credit. It may even prevent you from getting a job.
Be aware that there are many fraudulent debt consolidation and student loan forgiveness companies that will charge fees to file free paperwork for you. Practice caution with any company that asks for money up front to remove your debt.
If youre considering filing for bankruptcy, hopefully your student loan repayment isnt the primary cause, especially if you have federal loans. Federal student loans have a number of plans and programs to help borrowers from defaulting on their loans. If youre carrying serious debt beyond your student loans, your debt-to-income ratio will help you qualify for an income-driven repayment plan and your student loan payments could drop as low as $0.
IonTuition is an expert in the student loan repayment space and specializes in helping borrowers avoid bankruptcy.
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The Additional Step: Filing An Adversary Proceeding
Here’s where things get more complicated. As stated earlier, just filing for bankruptcy under either Chapter 7 or Chapter 13 is not enough to have your student loans discharged. You must take the additional step of filing an adversary proceeding.
Under the U.S. bankruptcy code, an adversary proceeding is a proceeding to determine the dischargeability of a debt. In other words, it’s a lawsuit within a bankruptcy case. Included in the adversary proceeding paperwork is “a complaint.” The complaint includes administrative details, such as your bankruptcy case number, along with the reasons you are seeking to discharge your student loans in bankruptcythe circumstances of your undue hardship.
Thisadditional step is necessary because student loans and a few other types of debt have stricter requirements for discharge than credit card debt, for example. These requirements are described in section 523 of the U.S. bankruptcy code. The keywording that relates to the discharge of student loans is: A discharge under…this title does not discharge an individual debtor from any debt…unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtors dependents.” Note the words “undue hardship,” which is discussed below.
Bankruptcy And Student Loans: What You Should Know
May 08, 2021 · 5minute read
Were here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey.Read moreWe develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide.We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right.Read less
When youre struggling to pay back your student loans, whats your next step? With Americans owing approximately $1.7 trillion in student debt, youre not the only one asking this question. With bills piling up, some might even consider bankruptcy.
The question is, does bankruptcy clear student loans?
Well, it is possible to discharge student loans in bankruptcy but it is difficult and rare. Read on for information on types of bankruptcy and other requirements there may be in order to potentially qualify to have student loans discharged in bankruptcy.
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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.
Most Back Taxes And Customs
This generally includes income taxes, Social Security taxes and penalties you owe, or unpaid withholding tax for your employees.
Although most back taxes cannot be discharged in bankruptcy, you may be able to have taxes discharged if they are for a return due 3 or more years ago and you meet certain other qualifications.
If you owe significant back taxes you cannot pay in a reasonable period of time, you may want to ask a tax attorney or other professional about an Offer in Compromise, or OIC, or other alternatives.
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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:
Consider Other Options Before Bankruptcy
Obtaining a bankruptcy discharge of your student loans is not easy, and fortunately there are other steps desperate borrowers can take before making this last-ditch effort.
“In proceedings where clients of ours have tried , if they can’t prove that they have no hope of paying back the debt, then the Department of Education usually responds by telling the borrower to enroll in an income-based repayment plan,” Hornsby explains.
Federal income-driven repayment plans recalculate your monthly bill based on any changes in your income. Your monthly student loan payment is therefore reflective of how much you can afford to pay.
Hornsby suggests income-driven repayment plans such as Pay As You Earn and Revised Pay As You Earn . With these programs, your credit score won’t be ruined like it would in bankruptcy proceedings, plus you’ll only need to pay 10% of your discretionary income. After the repayment period ends, any remaining balance is forgiven.
If your monthly payment is just too high, consider refinancing your student loans. Through refinancing, you can both score a lower interest rate and extend your loan term so that your monthly payments are lower. Though this means more months, or years, of interest collecting, it can help you in the immediate term if you are tight on cash.
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Chapter 13 Bankruptcy And Student Loan Debt
Chapter 13 bankruptcy allows you to create a three- to five-year repayment plan to better manage your debts. Your student loan payments may be included in these payments. Thus, you may be able to lower your monthly payments through Chapter 13.
This can be especially helpful for private student loans that often have fewer repayment options than student loans that originated from the U.S. Department of Education. However, you should keep in mind that if the court prioritizes other debts over your student loans, you may end up accruing additional interest on those loans if the court lowers the amount of your payments.
Hire A Student Loan Bankruptcy Attorney
Since student loan debt is not typically included under a bankruptcy filing, it might be helpful for you to enlist the aid of a student loan lawyer. As the legal process can be long and cost significant amounts of money, its best for you to determine whether or not filing for bankruptcy is worth the time and money involved. It might be more prudent to consider income-based repayment or other alternatives before going down this path.
With the help of an experienced attorney, youre significantly more likely to to have your student loans discharged.
Most bankruptcy attorneys offer free initial consultations, allowing you to meet face-to-face, ask initial questions, and find the person who you believe will best help you discharge your student loans. Perhaps most importantly, its important that you find someone who you are comfortable communicating with.
If you call a bankruptcy office and they are not the best communicators or the friendliest to talk to, call another office, notes financial expert Steve Rhode. In fact you might want to contact several offices and see if you connect with them. Start you search there. An exceptional bankruptcy attorney and bankruptcy office will make the process, easier, not harder. They will realize you are feeling stressed and apprehensive, as most people are in that situation, and make the process as painless as possible.
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Federal Loans And Hardship
Your student loan holder may choose not to oppose your petition to have your loans discharged in bankruptcy court if it believes your circumstances constitute undue hardship. Even if your loan holder doesn’t, it may still choose not to oppose your petition after evaluating the cost of undue hardship litigation.
For federal loans, the Department of Education allows a loan holder to accept an undue hardship claim if the costs to pursue the litigation exceed one-third of the total amount owed on the loan . Private student lenders are likely to apply similar logic.
Old Federal Loan Programs
There are a few federal student loan programs that are no longer available. But, they still show up online when you do a search for federal loans, so itâs good to know what they are.
Federal Family Education Program
Under FFEL, the loans were made by private lenders, insured by guaranty agencies, and then insured again by the federal government. Basically, if the student defaulted on a loan issued under FFEL, the federal government would pick up the tab and repay the private lender. No new FFEL Program loans have been made since July 1, 2010.
Federal Perkins Loans
This type of federal loan has a low interest rate and is reserved for students with exceptional financial need. No new Perkins Loans have been made since September 30, 2017.
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Bankruptcy Is A Powerful Tool For Debtors But Some Kinds Of Debts Cant Be Wiped Out In Bankruptcy
By Cara ONeill, Attorney
If youre facing severe debt problems, filing for bankruptcy can be a powerful remedy. It stops most collection actions, including telephone calls, wage garnishments, and lawsuits . It also eliminates many types of debt, including credit card balances, medical bills, personal loans, and more.
But it doesnt stop all creditors, and it doesnt wipe out all obligations. For instance, youll still have to pay your student loans and arrearages for child support, alimony, and most tax debts. Read on to learn more about:
- what you can expect in both Chapter 7 and Chapter 13
- the benefits offered by Chapter 13 alone, and
- things that cant be accomplished by filing for bankruptcy.
Only In Rare Cases Will You Be Able To Discharge Federal Student Loans In Bankruptcy
In order to have your federal loans discharged through bankruptcy, you must declare Chapter 7 or Chapter 13 and prove that repaying your student debt imposes undue hardship on you and your dependents. There are no set requirements to prove undue hardship, and courts will look at a number of factors including:
- if your repayment would prevent you from maintaining a minimum standard of living
- If your repayment will create a lasting hardship over a long period of time
- how much effort youve put into repayment before filing for bankruptcy
If the court determines that your student loans create undue hardship, your loan may be fully discharged, partially discharged, or the terms of your loan may be altered to make repayment feasible.
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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.
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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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 § 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.
Can Student Loans Be Discharged In Bankruptcy
If you want your student loans and other debts discharged outright, youll need to file a Chapter 7 bankruptcy. But keep in mind theres no guarantee your student loans will be discharged unless certain other criteria are met. If you dont qualify to file Chapter 7, you may be able to restructure your student loan payments or have them discharged in a Chapter 13 bankruptcy. Once your Chapter 13 bankruptcy ends , youll be responsible for repaying your federal student loans if you werent able to prove undue hardship.
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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.
