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How To File Bankruptcy On Student Loans

Companies That Pay Off Student Loans

Bankruptcy Questions : How to Claim a Student Loan on Bankruptcy

National and global companies have recognized the toll that monthly student loan payments take on their employees. Some are willing to offer repayment assistance and tuition reimbursement to help them recruit top talent. Unfortunately, not all of these student loan repayment programs are as helpful as they might initially seem.

Continue To The Next Article Student Loan Debt And Waiting Periods

If you want to learn more about how to deal with your student loan debt then you should speak with a Licensed Insolvency Trustee. You can find trustees everywhere from Ottawa to Montreal, from Calgary to Quebec and more. Find one today!

You can also skip to any one of the article sections below to continue reading or re-cap on any information covered in this series of articles

A Student Loan Isnt Always A Student Loan

The U.S. Bankruptcy Code does not except student loans from discharge. Instead, it lists specific types of educational debts that survive the end of the case. If your student loan does not fit the definition of the type of educational debt listed in the bankruptcy law then it will be discharged at the end of the case. For that reason, its important to look at the loan and make sure it fits or doesnt before your case is filed.

Your student loan will not be discharged at the end of the case if it was:

  • An educational benefit overpayment or loan that was made, insured, or guaranteed by a governmental unit or
  • An educational benefit overpayment or loan that was made under any program funded in whole or in part by a governmental unit or nonprofit institution or
  • An obligation to repay funds that you received as an educational benefit, scholarship, or stipend or
  • Any other educational loan that is considered a qualified education loan under the federal tax laws.
  • Made, Insured, or Guaranteed by a Governmental Unit: If the loan was issued by the federal or state government then it will not be automatically discharged. In addition, a loan issued or guaranteed by a foreign government will not be automatically discharged under the bankruptcy laws.

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    What About Private Student Loan Debtors

    Unfortunately, the Education Departments efforts and new reforms like the Fresh Start through Bankruptcy act only cover federal student loans. It means, both attempts, if successful, will not help private student loan borrowers. The undue hardship is still required for such borrowers. Unless Congress passes legislation that involves private student loans, there is no expectation of improved conditions for bankruptcy on private debt.

    Bankruptcy Discharge Of Student Loans Is Very Rare

    Can You File Bankruptcy on Student Loans?

    You cant simply wave a magic wand, announce to the world I declare bankruptcy and watch your student loans disappear. It isnt that easy.

    In a 1981 bankruptcy court case, Judge Burton R. Lifland said that discharging student loans required a certainty of hopelessness, not simply a present inability to fulfill the financial commitment.

    It is much easier to wipe away credit card debt, personal loans, auto loans and mortgages than student loans. The U.S. Bankruptcy Code puts student loans in the same category as child support obligations, taxes and criminal fines.

    Statistics concerning the rarity of bankruptcy discharge for student loans are based on information provided by the Educational Credit Management Corporation . ECMC is the guarantee agency that services defaulted federal student loans when the borrower files for a bankruptcy discharge.

    Only 29 of 72,000 student loan borrowers with active bankruptcy filings in 2008 succeeded in getting a full or partial discharge of their student loans, according to ECMC.

    Thats 0.04%, or odds of about 1 in 2,500. Youre more likely to die of a heart attack or of cancer than to get your student loans discharged in bankruptcy. Still, the odds of discharging student loans in bankruptcy are better than your odds of winning the Powerball lottery jackpot.

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    How To Prepare For Bankruptcy On A Student Loan

    Bankruptcy in all cases is never an easy process and in case of a default on student loan, it is more so. And the only point that you can cling to is to prove undue hardship. This means proving your inability to repay your federal student loan.

    This throws the ball in the judges court, who may interpret your eligibility on his or her own terms. Courts usually go for The Brunner Test in evaluating hardship that can be had from the Federal Student Aid office of the US Department of Education.

    Some important points enumerated in The Brunner Test are:

    • Repaying your federal student loan does not allow you to maintain a basic standard of living.
    • That such hardship will last for most of the duration of the repayment period.
    • That you unscrupulously tried to repay your federal student loan up till now.

    Although these points may sound easy to prove, but showing extreme hardship never quite convinces the judge. And if you do prove it successfully, the bankruptcy filed by you may not be fully discharged. It may be partially discharged or restructured. In the latter case, new payment terms are drawn to make it easier for you to repay.

    What are the steps to follow in student loan bankruptcy case?

    Criteria Based On The Student

    The student who is using the student loan:

    • Must be enrolled on at least a half-time basis.
    • Is seeking a degree, certificate or other recognized educational credential.
    • Cannot be a dual enrollment student. A dual enrollment student is a student who is simultaneously enrolled in an elementary or secondary school in addition to a college or university.

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    When To File An Adversary Proceeding: Chapter 7

    If you choose to file for Chapter 7, you can file the adversary proceeding right after filing your bankruptcy case. If you’ve already gone through Chapter 7 bankruptcy and your case has been closed, you may still be able to file an adversary proceeding to get your student loans discharged. How much time you have to do so depends on where you live and the courts.

    If your Chapter 7 case is already closed, you must first move to reopen your bankruptcy case. This is procedural and does not restart the bankruptcy or eliminate the discharge you may already have received for your debt.

    How Common Is Filing For Bankruptcy For A Student Loan

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

    If statistics are anything to go by, very few people try to erase student loan through bankruptcy. According to a study published by the American Bankruptcy Law Journal, 2012, of all the people who filed for bankruptcy in 2007, only 0.1 percent constituted those who wanted to discharge their student loan.

    The success rate out of 207 cases, that this study examined, was only 39 percent. This comprised students who got partial or full student loan discharges.

    Why filing for bankruptcy on a student loan is not popular is because in getting relief from your creditors, you hurt your credit score for several years and also incur heavy expenditure in court fees. However, filing for such bankruptcy is not at all a bad thing.

    The point to understand is that you have already hurt your credit score by defaulting on debt, so you might as well file for bankruptcy and make a fresh start.

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    Changes To Bankruptcy Law

    Over the years, different members of Congress have introduced legislation to make student loans dischargeable in bankruptcy like other types of debts. But, unfortunately, that legislation has gone nowhere.

    And while America waits for Pres. Joe Biden to forgive student loan debt, another proposal to change the treatment of student loan debt in bankruptcy was introduced, this time by Sen. Elizabeth Warren. Sadly, like the legislation before it, the Consumer Bankruptcy Reform Act of 2020 has yet to go anywhere.

    What Is Refinancing Student Loans

    The benefits of student loan refinancing are different for everyone. How much refinancing can help you will depend on your existing loans and your current financial situation. This article covers what student loan refinancing is and how it works. Youâll also learn how to determine whether refinancing is right for you and how to compare lenders to maximize your benefits.

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    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.

    Understanding The Impact On Your Consumer Report

    Can You File Bankruptcy On Private Student Loans

    Bankruptcy can remain on your consumer report for up to 10 years… Read more >

    Bankruptcy can remain on your consumer report for up to 10 years. This may impact your eligibility for Title IV federal financial aid. Obtain a free copy of your consumer report at www.annualcreditreport.com.

    You can dispute any entry on a consumer report by filing a dispute with the national consumer reporting agencies.

    For more information about managing a defaulted loan, visit our Resolving default section.

    No matter what you decide to do, keep your loan holder informed.

    If ECMC holds your loan, call us at 888-363-4562. If you don’t know who your loan holder is, go to the Federal Student Aid website, which is the central database for all federal student loan information.

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    How Do Student Loans Work

    Student loans can be offered by the federal government, local governments, or private lenders. They can be used to finance tuition, room and board, and living expenses. The rules and terms for student loans vary and the debt associated with these loans generally cannot be discharged via bankruptcy.Repayment options for federal loans differ from those available for private loans. Similarly, interest rates, grace periods, and prepayment terms differ as well. It is important to understand how the loans you’re either being offered or have already taken out “work” when developing a successful plan to repay your student loan debt obligations.

    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.

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    Bankruptcy Canada Student Loans

    How student loans are affected by a bankruptcy in Canada can be quite confusing. The laws around bankruptcy Canada student loans have changed in recent years adding to the difficulty in knowing whether or not your student loans would be discharged in a bankruptcy. While we explain the general principles behind student loans, bankruptcy and consumer proposals, we recommend you .

    How To Start Bankruptcy

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

    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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    Criteria Based On The Borrower

    • The loan must have been borrowed by a U.S. taxpayer.
    • The student must have been the borrower, the borrowers spouse or a dependent of the borrower. For example, private parent loans are not considered qualified education loans if the borrower did not claim the student as a dependent. If the loan was borrowed by a grandparent, aunt or uncle of the student and the student was not claimed as a dependent, the loan is not a qualified education loan.

    Is Your Private Student Loan A Qualified Educational Loan

    As stated above, if you have a private student loan, you may have other arguments available in addition to undue hardship. You can discharge private student loans in bankruptcy in a number of other ways.

    There is a presumption that student loans in bankruptcy are non-dischargeable if they meet the statutory requirements. For private student loans, this requires the loan to be a qualified educational loan.

    To be a qualified education loan, a private student loan must be:

    • For an eligible student

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    Should You File Student Loan Chapter

    While student loan chapter discharge is feasible, its doubtless solely value exploring within the following cases:

    • Youve exhausted all cost choices. If you have got federal student loans, see if you happen to can afford income-driven reimbursement or qualify for a loan forgiveness program. Private student loans have fewer choices for struggling debtors. Still, name your lender or servicer and ask whether or not they can briefly decrease your cost or rate of interest.

    • Youre past-due in your student loans. If you have not missed funds, youll doubtless have a tough time proving theyre inflicting undue hardship. Bankruptcy makes extra sense in cases of student loan default particularly when youve got defaulted on personal student loans and your lender is suing you in an try to garnish your wages.

    • You dont have any pathway out of default. Federal student loans have choices to get out of default, together with loan rehabilitation and consolidation. If youve defaulted on a loan a number of occasions, you will have exhausted these choices.

    These conditions are not any assure a chapter courtroom will discharge your student loans, however it has occurred for some debtors. A research printed within the American Bankruptcy Law Journal in 2012 discovered that, in 207 chapter instances by which debtors included their loans, 39% gained full or partial student loan discharges.

    Ask a couple of student loan settlement

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    Can You Prove Undue Hardship

    Can You File Bankruptcy On Your Student Loans

    If you cant prove undue hardship, theres no way to get your student loans discharged, no matter how your bankruptcy case fares.

    Unfortunately, showing hardship is pretty difficult, and the exact method will depend on what state youre in and the testing method used. Here are the two types that courts currently use when determining whether an undue hardship exists.

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    Is Your Student Loan Really A Student Loan If Not

    The concept of student loans is straightforward â a student or aspiring student applies for a line of credit to be used to pay for tuition and other educational expenses. However, not all student loans are created equal. Whether your student loan may be discharged by the bankruptcy court ultimately comes down to whether your student loan meets specific requirements and whether remaining indebted to your student loan creditors will cause you undue hardship. If your financial situation meets the criteria outlined by the court, your student loan may be discharged. If not, youâll need to use other debt relief resources to make your student debt more manageable.

    How To Get The Ball Rolling Not A Slam Dunk

    Natalie wants readers to understand this is not a slam dunk. First, you need to find a bankruptcy attorney who is familiar with the undue hardship rules, as many are not.

    It is important to understand that you will be filing for bankruptcy, and, as you are claiming an undue hardship, this will be decided in what is called, An Adversary Proceeding in bankruptcy court. This is a real lawsuit, as the creditor wants to be paid and you are trying to demonstrate why the loan should be forgiven.

    You will appear before a judge who will most likely use the Brunner Test to decide if you have an undue hardship.

    If you can prove all three of these elements, you are entitled to a discharge, but youve got a lot of work to do, beginning with conducting discovery.

    Be prepared to provide financial records, tax returns, bank statements showing your financial resources, proof of expenses, housing, utilities, food, etc. You will need to present a detailed picture of your financial life.

    She also wants readers to understand that not all student loans are Qualified Education Loans.

    For example, a private bank making a loan where the amount exceeds the published cost of attendance might not be a qualified loan and therefore is dischargeable without having to show undue hardship.

    Her website is well worth the time for anyone facing crushing student loan debt.

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