Student Loan Bankruptcy: The Process
For many people, student debt is the one debt they can’t seem to overcome no matter what they do. They’ve made payments when their financial situation allowed. Asked for deferments and forbearances when they couldn’t. They’ve applied for loan forgiveness and lower interest rates. And they’ve even asked for options to reduce their outstanding student loan debt via settlement.
Nothing has worked thus far.
It’s at that point that filing student loan bankruptcy becomes an option.
Student Loan Hardship Options
If youre struggling with student loan debt, know that bankruptcy wont discharge that debt. However, there are options to make your payments more manageable.
Borrowers with federal student loans can choose to pursue deferment or forbearance for up to three years total. Depending on the type of student loans you have and the type of relief you choose, interest may still accrue during this time. Through Sept. 30, 2021, all federally owned student loans are automatically under forbearance with no interest accrual.
Another option for federal borrowers is to switch to an income-driven repayment plan with a loan forgiveness option.; This will extend your repayment timeline, but because the plan bases your student loan payments on your actual income, your monthly payment may be as low as $0.
If you have private student loans, you may still be eligible for deferment or forbearance options. This depends on the lender; if youre facing financial hardship, call your lender and ask about your options.
What Happens To My Debts When I Go Bankrupt In Canada
What happens to your debts when you go bankrupt in Canada? Does declaring bankruptcy clear all debts? These are complex topics. The answers depend on the type of debt, and in some cases on your payment status. There are actually some debts that stay , even if you file for bankruptcy.
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You May Be Able To Refinance Your Loan At A Lower Interest Rate
Refinancing your student loan is one other different to student loan settlement. When you refinance a loan, youre taking out a brand new loan to repay an outdated loan, so it might take extra time to repay your loan. The major advantage of refinancing your student loan is that youll pay a decrease rate of interest than the one youre paying now, or at the very least a hard and fast rate of interest as an alternative of a variable rate of interest. This might prevent hundreds of in the long term.;
Federal student loan refinancing is barely obtainable in restricted circumstances for sure loans, however you might be able to discover a non-public firm to refinance a federal loan. If youre taking this method, youll have the drawback of dropping the entire reimbursement, deferment, forgiveness, and forbearance choices the federal authorities affords, so be sure youve exhausted all options and might afford to make student loan funds on the brand new plan.;
Student Loans In Chapter 7 Bankruptcy
You are automatically covered by an involuntary stay as you apply for bankruptcy, which prohibits creditors from continuing to recover the debts that you owe them. This protection extends to lenders of student loans, and as a consequence, if your lawsuit is filed, your loans will be put into involuntary forbearance. During the time that the bankruptcy case is open, debt continues to accrue, and you will be responsible for those sums. You can take a break, though from making your daily debt fees because your bankruptcy under Chapter 7 is pending. Currently, in bankruptcy, this is the best way to treat student loans. Your debts are always sold if you go bankrupt or are moved to another organisation, and they will not be fully paid if you attempt to make your monthly payment. Therefore it is important to consult with your creditors after you file your lawsuit if you intend to continue making payments, and to keep track of all payments you make whilst your bankruptcy case is open.
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How To File For Bankruptcy With Student Loan Debt
Presidents Bidens American Rescue Plan Act of 2021, put the repayment of federal student loans on pause, interest-free through the end of September for a total of 18 months.; Over 44 million Americans have unpaid student loan debt totaling more than 1.6 trillion dollars, and as September is only a few months away, you may be wondering, if there is any way to eliminate that debt?
Student Loan Mediation Before Litigation Program
If you are not sure if you qualify for a discharge under the Undue Hardship Standard, but are having difficulty paying your student loans, the United States District Bankruptcy Court for the Southern District recently created a program, as of January 27, 2020, to help resolve student loan disputes through a court-supervised mediation process.; This new program has created a forum for debtors and creditors to discuss consensual repayment options for government student loans and possible workouts for private student loans.
The SLM Program facilitates two different types of Student Loan negotiations:
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Talk To A Bankruptcy Lawyer
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How To Pursue Student Loan Discharge In Bankruptcy Proceedings
Meeting the standard of undue hardship is incredibly difficult, so its worth speaking with a;bankruptcy lawyer to see if its even a possibility in your unique situation. However, you may be able to claim it under certain circumstances, such as living with a permanent disability or terminal illness.
Even if you think you meet the standard of undue hardship, its important to understand that discharging student loans involves additional work on top of the standard bankruptcy proceeding.
Its not as simple as filing for bankruptcy, Kantrowitz says. Its an adversary proceeding within a bankruptcy proceeding. That means the lender gets to defend against bankruptcy discharge.
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.
Filing For Bankruptcy On Your Student Loans Is Hard To Do
In order to file bankruptcy on student loans, borrowers have to meet a multi-part test proving that they have no chance of ever being able to pay the debt back. They have to demonstrate that paying their student loans would cause them “undue hardship.”
“Congress didn’t define what it meant by ‘undue hardship,’ so it was left to the courts to decide,” says higher education expert;. As such, courts use a common method called the Brunner Test to evaluate whether or not a borrower qualifies for student loan discharge through bankruptcy. Through the Brunner Test, a borrower must prove the following:
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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.
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But he says the rules are still too restrictive. Lawless researched the issue with a group of attorneys and former judges for the American Bankruptcy Institute, a professional organization. They’re recommending that Congress rewrite the rules on student loans in bankruptcy. Under the proposal, Lawless says, “after seven years from when the loans became due, they would be treated pretty much like any other debt in a bankruptcy case.”
There is at least some support for that in Congress. Part of the obstacle now is that the current rules often require paying your lawyer more money to attempt to get student debt forgiven.
Lawless says it costs on average about $1,200 to file a typical Chapter 7 bankruptcy case. Bankruptcy attorneys say it can cost thousands of dollars more to pay your lawyer to jump through the extra hoops related to student loan debt, unless you find one who will do that for a reduced rate.
Does Bankruptcy Affect Future Or Current Employment
You might be hesitant to file for bankruptcy because youre afraid you might lose your job. Maybe youre concerned that a potential employer will deny your employment if you filed for Chapter 7 or Chapter 13 bankruptcy. If you cant meet your financial demands with a job, how would you meet them without one?
Keep Track Of Your Credit During The Process
Because declaring bankruptcy can affect your credit history and ability to do certain things in the future, itâs important to monitor your credit scores during the process and as you work on recovering from the ordeal.
As you do so, watch how certain actions affect your credit scores and look out for potential errors and negative information that might influence your score negatively. If you do find something that doesnât belong on your credit report, dispute it with the credit reporting agencies.
As you keep track of your credit score during and after bankruptcy, youâll learn better how to improve it over time and keep it in a good place going forward.
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This service is completely free and can boost your credit scores fast by using your own positive payment history. It can also help those with poor or limited credit situations. Other services such as credit repair may cost you up to thousands and only help remove inaccuracies from your credit report.
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What Happens If I Have More Debt Than Just My Student Loans
If you are facing debt outside of your student loans, you can consider a bankruptcy or consumer proposal. These debt relief programs wont absolve you of your loans but will allow you to pause your payments until you have completed your program. The idea is that once your consumer proposal or bankruptcy is completed, you will have the tools and be in a better standing to repay your student loans.;
When you book a consultation with David Sklar & Associates, you can have peace of mind knowing that your trustee will work with you and consider your student loans when helping you weigh your debt relief options.
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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If Your Student Debt Is Less Than 7 Years Old
If you have had student debt for under seven years, you may not be eligible for a student loan bankruptcy discharge but you still have the option to negotiate new payment arrangements. You can do this by contacting the loans office or through the National Student Loan Service Centres Repayment Assistance Plan.
Your options include:
When To File Student Loan Bankruptcy
There’s no set time to file student loan bankruptcy. You can file it before your bankruptcy case closes. Bankruptcy law also allows you to file it after the court closes your bankruptcy case.
From my perspective as a student loan lawyer, I recommend people should consider filing student loan bankruptcy when:
- they can no longer afford their private student loans and can’t afford a settlement
- they have a physical disability that limits their ability to work but does not qualify them for a total and permanent disability discharge
- they have defaulted a second time on a federal student loan and can’t get out of default
- they cannot get a professional license
- their elderly and have made a good faith effort to repay their student loans
If you decide you’re ready to file student loan bankruptcy after looking at your situation, the next step is to meet with a bankruptcy attorney to determine what bankruptcy you should file, Chapter 7 or Chapter 13.
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Income Driven Repayment Plans
Lets say your federal student loans are high compared to your income. It may be in your favor to repay your loans with an income driven repayment plan. Most federal student loans are eligible for at least one IDR plan. If your income is low enough your payment could be as low as $0 per month. In general, your payment plan under an;IDR is a % of your discretionary income.
|Type of Income Driven Payment Plan||Payment|
Cost To File Bankruptcy On Student Loans
The bankruptcy court does not charge court fees to file student loan bankruptcy. However, the fee you paid your bankruptcy attorney to file Chapter 7 or Chapter 7 did not include the attorney filing an adversary proceeding for student loans. Therefore, unless you find an attorney willing to file the AP at a reduced rate, you may have to spend several thousand dollars hiring a student loan bankruptcy lawyer.
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.