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How Does Filing Bankruptcy Affect Student Loans

What If I Dont Qualify To Discharge Student Loans Through Bankruptcy

The case for allowing students to file for bankruptcy over loan debt

You have many options available to you if you are having a hard time repaying your student loans:

You can see if you qualify for a Repayment Assistance Plan to reduce your monthly payments or a Revision of Terms Plan to give you more time to repay your loans. We provide more details for managing your student debt on our Student Loan Debt page.

Our local debt professionals will be happy to review all of the options available to you. We will personally guide you through all the methods and steps you can take to eliminate your student debt. Request a call today for a free appointment, with no obligations.

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Can I Get Rid Of My Student Loans In Bankruptcy

At present, student loans can only be discharged if you can prove that not discharging them presents an undue hardship to you. In the 8th Circuit Court of Appeals, which is the Circuit that Minnesota is in, the standard is described as: Simply put, if the debtors reasonable future financial resources will sufficiently cover payment of the student-loan debt while still allowing for a minimal standard of living then the debt should not be discharged. Long v. Educational Credit Management Corp., 322 F.3d 549, 554-55 . This is a difficult, but not impossible standard to meet. The most common circumstances leading to a hardship discharge are if a person is permanently disabled or has another severe issue that prevents them from working or working to their full potential. If you believe that you would be a candidate to have your student loans discharged, you should meet with us to discuss your situation.

Discharging your student loans in bankruptcy requires a special procedure called an adversary proceeding which requires you to sue your student loan lenders after your bankruptcy case is concluded to prove that the student loans present an undue hardship.

More often, we counsel our clients on the best way to manage their student loans. Bankruptcy can be effective in helping our clients manage their student loans.

How To Start Bankruptcy

After considering all your options, you should start the request process if you decide that bankruptcy is the only way out. First, you need to choose between two different types of bankruptcy: Chapter 7 and 13. You should check both options, their requirements, advantages, and disadvantages before deciding. In the following section, we present to you these two types of bankruptcy.

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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.

Consider Hiring A Lawyer

Bankruptcy  Can You Discharge Student Loan Debt?

While you dont technically have to go through a lawyer when filing bankruptcy on student loans, bankruptcy can be an incredibly complex process. It requires determining which type of bankruptcy youll file for and submitting an extra lawsuit, called an adversary proceeding . Going through it all alone could mean extra time, incorrect filings and, possibly, a lost case.

However, one thing to consider is that hiring a student loan lawyer could actually hurt your chances for discharging your student loans in bankruptcy, according to Fuller. Thats because some judges may feel that if you can afford fees for an attorney, then you can afford to be paying back something on your loans, which would disqualify you from experiencing undue hardship.

If you dont know a lawyer, dont worry. You can find one through the American Bar Association. You might be eligible for a lawyer at no cost to you through the Legal Services Corporation, an independent nonprofit created by Congress that offers financial support for civil legal aid to low-income Americans. Just make sure you pick a lawyer that specializes in bankruptcy and has very good reviews.

If you opt to handle your case yourself, a recent study by the American Bankruptcy Journal noted that debtors without a lawyer were just as likely to have their student loans discharged by a bankruptcy judge as those who worked with an attorney.

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What Happens To Student Loans In Bankruptcy

Bankruptcy discharge is a powerful tool, but does it erase a debtor’s student loan debt? Rarely. In most instances, the obligation remains to repay student loans despite filing Chapter 7 or Chapter 13 bankruptcy. In the most limited occasions, a debtor is able to meet the stringent test for establishing an undue burden in having to repay the student loan and is found to be eligible to receive a hardship discharge, which eliminates the student loan.

Can I Discharge My Student Loans In Bankruptcy In Pennsylvania

If youre a college graduate in Pennsylvania, and youve been struggling to stay current on your student loan bills, bankruptcy might offer a solution. However, bankruptcy can only eliminate student loan debt under specific circumstances, which means you will need to meet strict criteria to qualify. To learn more about getting rid of debt in Pennsylvania, contact the Philadelphia bankruptcy lawyers of Young, Marr & Associates for a free consultation today.

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Can You File Bankruptcy On Student Loans

Technically, yes. You can file bankruptcy on student loans. However, it is almost impossible. What makes bankruptcy hard to achieve is proving an undue hardship. This condition indicates that there is no way for you to pay the debt, and if you do, you will not survive. The problem with the condition is that there is no exact rule defining it. Each court can have different rules for hardship.

Besides, if you have a student loan, you most probably have a chance to get a degree. In this case, a borrower with a degree has more probability of finding a decent job in the future, which can help the debtor to repay the debt. Because of this possibility of payment, it is harder to wipe out student loans through bankruptcy.

Yet, there are some criteria used to determine hardship. For example, a Brunner test exists, which requires three main elements from the student loan borrowers. First, you need to prove that if you pay the debt, your current income will not allow you to pay for minimum living standards. Next, you need to show that this financial challenge will continue during most of the repayment period. Lastly, borrowers are obliged to prove that they have good faith. In other words, they tried all other options to pay off the debt before requesting bankruptcy on student loans.

What Is The First Step In Discharging Student Loan Debt In Bankruptcy

New option for student loan borrowers: bankruptcy

To start the process of discharging your student loans through bankruptcy, you must first file for bankruptcy. The good news for you is that our bankruptcy lawyers have years of experience in bankruptcy and can skillfully guide you through the process of choosing the right path for you, which will generally be either a Chapter 7 or Chapter 13 bankruptcy. You can discharge student loans in bankruptcy through any bankruptcy chapter so we will advise you on which chapter is best for you.

It is also important to note that if you have already filed and completed a bankruptcy, you may not have to file another bankruptcy. In these circumstances, our student loan lawyers can file a motion to re-open your bankruptcy and then go through the steps to challenge your student debt. Dont worry though, this doesnt have any effect on your credit.

Also Check: How To File Bankruptcy In Illinois

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.

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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What Happens If Your Student Loans Aren’t Discharged

If, as in most cases, your loans are not discharged in bankruptcy, here’s what happens.

  • Chapter 7 bankruptcy. In Chapter 7 bankruptcy, if payment of your loans is not an undue hardship, you’ll still owe them when your bankruptcy case is over.
  • Chapter 13 bankruptcy. If you can’t discharge your student loans, Chapter 13 bankruptcy provides some other ways that can help. For example, you’ll likely be able to pay a reduced amount during your Chapter 13 planalthough you’ll be on the hook for whatever amount is left after your repayment period ends.

Our Pennsylvania Bankruptcy Attorneys Can Help Relieve You Of Debt

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If youre thinking about filing for Chapter 13 or Chapter 7 bankruptcy in Pennsylvania, a bankruptcy lawyer of Young, Marr & Associates can help you understand your options, rights, and responsibilities. To start discussing whether bankruptcy is right for you in a free and completely private legal consultation, call our law offices today at 701-6519 in Pennsylvania.

Bankruptcy Resource Center

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What Happens To Your Student Loans When The Bankruptcy Is Over

When your Chapter 13 bankruptcy is over, the non-dischargeable nature of student loan debt kicks back in. While the remaining balance on your credit cards and other unsecured debts will be forgiven, you will still owe the rest of your student loans. The loans will also have continued to accumulate interest during the bankruptcy process, which may affect your monthly payments or total loan repayment going forward.

This is why it is so important to talk to an experienced bankruptcy attorney before you decide to file Chapter 13 bankruptcy in the hope it will affect your student loans. If your main goal is to get out from under college debt, there are other, non-bankruptcy options, that may be better suited to your needs.

At John A. Steinberger & Associates, P.C., we know how overwhelming it can feel to face thousands of dollars in student loan debt. We are a full-service bankruptcy law firm in Southeast MI. We serve debtors and families in Southfield, throughout Metro Detroit, and in the surrounding communities. We will help you consider all your options and find the best solution based on your goals and financial circumstances. Call us toll-free at 690-2140 or contact us online to schedule a free initial consultation.

Above And Beyond Normal Circumstances

The second factor that courts will take into account is whether you have circumstances that are above and beyond normal circumstances and whether these circumstances will extend throughout a significant portion of the term of the loan. This can be tough to show in some cases because it can be subjective and speculative.

Some of the potential circumstances that courts have seen as above and beyond normal circumstances include serious mental or physical disability of the individual or the individuals dependents which prevents employment and circumstances relating to an individuals employment opportunities including poor quality of education, maximized income potential in the chosen education field, and limited remaining years in the individuals work life.

As stated above, these circumstances must extend throughout a significant portion of the loan. They can not simply be a temporary situation that is likely to change in the near future. Due to the subjective nature of this factor, you will require the submission of evidence to prove your circumstances.

When you are trying to discharge student loans in bankruptcy, it is critical to show your circumstances are above and beyond normal circumstances. Our experienced student loan lawyers are skilled in putting together the best argument and supporting evidence, including expert reports, etc., to show that your circumstances are above and beyond normal 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.

Have You Considered Other Repayment And Forgiveness Options

Filing for Bankruptcy with Student Loans. New Court Case May Help.

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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Can Bankruptcy Eliminate College Tuition Debt

Now that weve covered the basics of how bankruptcy impacts student loan eligibility, lets look at the situation in reverse. Is it possible to get rid of student loan debt by filing for bankruptcy after you graduate?

Generally speaking, the answer is no. While bankruptcy can erase or alleviate the majority of your financial liabilities including but not limited to significant sources of debt like credit cards and medical bills there are a few types of debt which are generally unaffected. In most cases, bankruptcy cannot erase debts arising from back taxes, alimony and/or child support obligations, or student loans.

However, there is one exception: undue hardship. To determine whether undue hardship exists, the bankruptcy court will screen you with the three-pronged Brunner Test, which evaluates your standard of living relative to the poverty line, the expected prognosis for your current financial situation, and whether you have made sincere and transparent good faith efforts to pay off your student loans to the best of your ability.

Even with the Brunner Test, there is one caveat: hardship discharges are often difficult to obtain due to their rigorous standards. Debtors are strongly advised to seek representation from an experienced attorney, as pro se or self-representing debtors are frequently unsuccessful in their efforts to interpret the demanding and complicated rules and requirements set forth by the U.S. Bankruptcy Code.

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