Good Faith Efforts To Repay
The third factor that courts look at is whether you have made good faith efforts toward repaying your student debt. This is a measure of your efforts to obtain employment, maximize income, and minimize expenses. Some considerations that courts have taken into account include making payments when the debtor could, seeking deferment when necessary and negotiating an income-driven repayment plan. If you would qualify for an income-driven repayment plan, but you fail to sign up, this will be a negative factor for your case.
It is also important to note that the court will look to see if the student debt is a significant portion of your overall debt such that if you are able to discharge other debts in bankruptcy, you will free up money that can be used to pay off your student loans.
If you have consistently put in the effort to make payments and avoid missing payments at all costs, this can generally be an easier prong to prove. Nevertheless, when you are trying to discharge student loans in bankruptcy, it is critical to show you have made good faith efforts to repay.
Can You Discharge Student Loans In Bankruptcy
Yes! While not everyone is entitled to discharge student loans in bankruptcy, it is not impossible as many people would have you believe.
To determine whether you can discharge student loans in bankruptcy, you should start by identifying the type of loan that you have. Generally, you should know whether you have a federal student loan or a private student loan. While it is possible to discharge federal student loans in bankruptcy, it is more difficult to discharge federal student loans in bankruptcy than to discharge private student loans in bankruptcy.
Why? In order to discharge a federal student loan in bankruptcy, you must establish an undue hardship. This can be difficult to prove for many people. On the other hand, there are other ways to show that a private student loan can be discharged in bankruptcy . Well discuss this in more detail below.
What Is A Chapter 13 Bankruptcy Plan
A Chapter 13 bankruptcy plan is a reorganization plan detailing how you will pay some or all of your creditors. A typical Chapter 13 plan lasts three or five years, during which you make… Read more >
A Chapter 13 bankruptcy plan is a reorganization plan detailing how you will pay some or all of your creditors. A typical Chapter 13 plan lasts three or five years, during which you make monthly payments to a court-appointed representatives, called a trustee, under a court-approved plan of reorganization. That trustee distributes plan payments to your creditors as scheduled in your Chapter 13 bankruptcy plan.
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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.
Alternatives To Bankruptcy For Student Loans
Since bankruptcy can be an expensive and cumbersome process, most experts see it as a last resort for borrowers. Consider bankruptcy after youve exhausted all other options, like debt consolidation, credit counseling and negotiating with creditors for a lower payment or interest rate.
If youre balancing student loan payments with other expensive, dischargeable debts like credit cards and medical bills, then bankruptcy may be able to provide relief. But if student loans are your only concern, consider these alternatives.
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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 doesnt 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.
Calculating When The 7
If you are contemplating filing for personal bankruptcy or making a consumer proposal in the hopes of discharging your student loan debt, you should seek the help of a Licensed Insolvency Trustee to ensure that you have satisfied the 7-year waiting period.
To be prudent, if your goal is to have your student loans discharged, you should calculate the start date on the end of your education as the latter of
- The date you actually ceased attending school, or
- the last day of your exams for your final semester
You might want to add 30 to 90 days out of an abundance of caution.
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The Latest News About Student Loan Bankruptcy
In the past it has been difficult to get a private student loan discharge in bankruptcy, but several recent court cases have proved that it is possible.
One notable case came to the U.S. Court of Appeals for the 2nd Circuit from the U.S. Bankruptcy Court for the Eastern District of New York. In the original case, U.S. Bankruptcy Judge Elizabeth Strong concluded that private student loans were not part of the Bankruptcy Code Section 523, which states that any obligation to repay funds received as an educational benefit, scholarship or stipend is typically not eligible for discharge.
She maintained that the section of code did not define student loans or educational benefit, and that referring to a loan as an educational benefit would be an unconventional way to discuss a loan. The appeals court affirmed the lower courts ruling, arguing the U.S. Bankruptcy Code did not prohibit the discharge of a private student loan in bankruptcy.
Some see the 2nd Circuit decision as hope for a loosening of the criteria in private student loan bankruptcy discharge. However, in June 2021, the U.S. Supreme Court refused to hear the case of a Texas woman who sought to have her private student loans discharged under a different standard so it appears that the undue hardship requirement may still be in effect.
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A Brief History Of Student Loan Debt And Bankruptcy
Prior to 1976, student loans could be discharged in bankruptcy easily. But in 1998, Congress significantly modified bankruptcy law to only allow a discharge if repaying student loans created an undue hardship.
In her own experience, I was a good fit for the undue hardship claim, and there are thousands of people across the country in the same situation as I was. She summarized the criteria for a finding of undue hardship:
The Brunner test is used by the most bankruptcy courts, and requires a finding that:
How Long Will The Adversary Proceeding Take For Federal Student Loans
As stated above, the adversary proceeding works much like a lawsuit in that it starts with a complaint and continues through a trial and appeal. How long this takes may depend on whether you have a federal student loan or a private student loan.
When dealing with federal student loans, you can expect the US government to fight the case to the end and there will generally be no settlement of any value to you offered by the federal government. As such, the adversary proceeding will almost always require proceeding through the summary judgment phase at the very least. This can take up to one year to complete. If the case requires a trial or goes through an appeal, you can expect this timeline to increase.
On the other hand, the odds of settling your case prior to trial are much higher with private student loans. These lenders tend to recognize that they may lose the trial. As a result, they may be more willing to negotiate than the government would be.
Every case is different and a student loan lawyer can help give you a better idea of the timeline specific to your situation.
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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.
What Does It Mean To Declare Bankruptcy
Bankruptcy is a way of clearing your debtswhich adversely affects your creditthrough the court system, whose job is to sort through your assets and determine what debts to forgive that youre unable to pay.
People looking to discharge student loans would be required to file eitherChapter 7 or Chapter 13 bankruptcy, according to the Federal Student Aid website.
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What Is The First Step In Discharging Student Loan Debt In 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.
How To File For Student Loan Bankruptcy Investopedia
The bankruptcy court will decide how much you will pay each of your creditors each month. If you have other debts that are legally categorized as a higher What Is Student Loan Bankruptcy? · Filing for Student Loan Bankruptcy
How Bankruptcy Affects Student Loans Filing bankruptcy does not prevent you from getting federal student loans or other types of federal financial aid. Rating: 5 · 1,439 reviews · Free · Finance
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Student Loan Bankruptcy Reform Legislation
While a shift in the Department of Educations treatment of undue hardship bankruptcy cases for federal student loan borrowers would be significant, it would take an act of Congress to fundamentally and permanently change the bankruptcy code.
In August, a bipartisan group of senators unveiled the Fresh Start Through Bankruptcy Act. The bill, sponsored by Senator Richard Durbin and Senator John Cornyn , would amend the bankruptcy code to more easily permit federal student loan bankruptcy loan discharges.
Specifically, the bill would eliminate the undue hardship standard for federal student loan borrowers who have been in repayment on their loans for at least the previous 10 years, allowing these borrowers to eliminate their federal student loan debt as easily as any other type of dischargeable consumer debt. No adversary proceeding would be required. The 10-year waiting period would be similar to earlier bankruptcy legal standards for student loans decades ago, before Congress passed legislation establishing the undue hardship standard. Such waiting periods were designed to prevent fraud .
While the Fresh Start Through Bankruptcy Act enjoys bipartisan support, its fate is currently uncertain, as Congress is now focused on other pressing matters, including passage of President Bidens signature infrastructure and social spending bills.
Private Student Loan Borrowers Left Out Of Bankruptcy Reforms
Importantly, both the administrative actions being contemplated by the Department of Education, and the reforms contained in the Fresh Start Through Bankruptcy Act, would pertain only to federal student loan borrowers. The onerous undue hardship standard would remain in place for private student loan borrowers unless Congress passes legislation that covers private student loans. Private student loan borrowers have also been excluded from other recent student loan relief, including billions of dollars in student loan forgiveness recently enacted by the Biden administration.
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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.
Decide Which Type Of Bankruptcy To File For
Next, on your own or with your lawyer, youll need to decide whether to file for Chapter 7 or Chapter 13 bankruptcy. Student loan bankruptcy can be addressed under either Chapter 7 or Chapter 13 bankruptcy, though its treated differently under the two categories.
Below is a breakdown of some of the qualifications and how each type of bankruptcy treats student loan debt:
Chapter 7 bankruptcy
- You must prove you have little disposable income available to pay off your debt.
- Most unsecured debt can get wiped out.
- Student loan debt may be eligible for discharge.
- The process can take about four months.
Chapter 13 bankruptcy
- You have some income to use to repay some of your debts.
- Your debt will be restructured, and some of it will need to be repaid.
- Student loan debt may be eligible but your repayment will be restructured, not discharged.
- The court process can last from two to six months, and the repayment plan can take three to five years.
Note that personal bankruptcy can come at the cost of hurting your credit for years. When it comes to your credit report, a Chapter 7 bankruptcy remains there for 10 years, while a Chapter 13 bankruptcy stays for seven years, which can make it difficult for you to secure loans or credit, as well as favorable rates. When you file for bankruptcy, you can also rack up significant legal and court fees along the way.
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Loan Discharge Because Of Disability
If you are disabled, you may be able to get your loans discharged without having to go through bankruptcy proceedings.
With certain federal loans, Total and Permanent Disability Discharge is available to those who are totally and permanently disabled. If youre eligible, the loan servicer can forgive the total remaining balance of your loans. For more information and how to apply, visit DisabilityDischarge.com.
Although not all private loan lenders offer discharges in the case of disability, some do. For example, College Ave will forgive the remaining balance if the borrower becomes permanently disabled.
If you have a disability and want to apply for a loan discharge, contact your lender directly via the customer service department. Explain your situation and what has changed since you took out the loans, and ask if the lender offers loan discharges in the case of disability.
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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How Can Bankruptcy Affect Financial Aid
Bankruptcy is a complicated issue that affects numerous areas of your life. But in general, filing for bankruptcy or having a chapter 13 doesnt interfere with your eligibility to receive federal aid.Other types of assistance may not be available to you after filing bankruptcy, but it depends on both the type of bankruptcy for which you filed and the student loan programs to which you apply.
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In Chapter 13 Bankruptcy You May Be Able Reduce Or Delay Student Loan Payments During Your Repayment Period
By Baran Bulkat, Attorney
Except in rare circumstances, student loans cannot be discharged inbankruptcy. But if you are struggling to make your student loanpayments, filing for Chapter 13 bankruptcy can allow you to delay orreduce your monthly obligations. Read on to learn more about how Chapter13 bankruptcy can help you manage your student loan debt.
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