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.
Should You File Student Loan Bankruptcy
While student loan bankruptcy discharge is possible, its likely only worth exploring in the following instances:
Youve exhausted all payment options. If you have federal student loans, see if you can afford income-driven repayment or qualify for a loan forgiveness program. Private student loans have fewer options for struggling borrowers. Still, call your lender or servicer and ask whether they can temporarily lower your payment or interest rate.
Youre past-due on your student loans. If you haven’t missed payments, youll likely have a hard time proving your loans are causing undue hardship. Bankruptcy makes more sense in instances of student loan default especially if you have defaulted on private student loans and your lender is suing you in an attempt to garnish your wages.
You have no pathway out of default. Federal student loans have options to get out of default, including loan rehabilitation and consolidation. If youve defaulted on a loan multiple times, you may have exhausted these options.
These situations are no guarantee a bankruptcy court will discharge your student loans, but it has happened for some borrowers. A study published in the American Bankruptcy Law Journal in 2012 found that, in 207 bankruptcy cases in which debtors included their loans, 39% won full or partial student loan discharges.
What Happens When Your Chapter 13 Case Is Over
At the end of the Chapter 13 plan period, your bankruptcy will likely discharge the remaining amounts you owe on your credit cards and other unsecured debts, even if you don’t pay those claims in full through your Chapter 13 plan.
The bankruptcy case will not get rid of your remaining student loan debt, however. Your lender will recalculate your payments based on your loan balance at the end of your case and set up a new payment schedule. At that time, you may be in a better position to afford your student loan payments, especially after discharging other debts.
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Everything You Need To Know About Student Loans In Canada
Many Canadians struggle with student loan debts. A crushing student debt load can be detrimental to young people just starting off their careers and their inability to service this debt can put pressure on family members who attempt to assist in paying these student loan debts.
According to the Canadian Federation of Students , the national student loan debt was $15 billion in 2015. And a 2020 report by the Huffington Post puts that number at $22 billion today.
As you can see, student loan debt is a big issue in this country. In fact, 49% of college students had debt in 2015 according to Statistics Canada.
Studies show that student debt can impact mental health, and its the main reason that young people decide to opt out of higher education. However, obtaining a student loan can still be a worthwhile undertaking, provided you choose a field of study that will increase your earning potential in the future. Keep in mind that you can still apply for a student loan even if youre bankrupt.
Thats why its an issue that should be dealt with seriously, requiring careful planning and an understanding of bankruptcy laws. You want to pay off your student debt and ask for relief so you can go on with your life.
If you have student loan debt, learn now about waiting periods to file for student loan bankruptcy.
Understanding the ins-and-outs of Canadian insolvency laws will help you make your claim correctly and avoid any headaches with an incorrect claim.
Will I Lose Student Loan Eligibility If I File For Bankruptcy
Generally speaking, the answer is no. While bankruptcy can erase or alleviate the majority of your financial liabilities including but not limited to
While other forms of debt relief do exist, notably deferment and income-driven repayment followed by forgiveness after a set period, critics of bankruptcy
Students who have filed for bankruptcy may have eligibility for further financial assistance. Many times, the Office of Student Financial Assistance can
Have You Considered Other Repayment And Forgiveness Options
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.
Student Loan Forgiveness For Doctors And Nurses In Canada
Eligible family doctors, residents in family medicine, nurse practitioners, and nurses can get Canada Student Loan forgiveness through the federal government. However, only the federal portion of the loan can be forgiven .
Eligibility For Student Loan Forgiveness For Doctors and Nurses in Canada
To qualify for this type of Canada Student Loan forgiveness, you must:
- Have a Canada Student Loan thats in good financial standing
- Be working as an eligible medical professional in an under-served or remote region with a lack of proper healthcare .
- Have been employed for at least one consecutive year in an underserved or remote community and provided at least 400 hours of in-person service.
- Submit an this application
Eligible Medical Professionals
To qualify for Canada Student Loan forgiveness, you must be one of the following medical professionals :
- Nurse Practitioner
- Family Medical Resident
You may get Canada Student Loan forgiveness for nurses and family doctors and if you are:
- Enrolled in full-time studies
- Repaying a student loan
- In your non-repayment period
If your loan is in its repayment period, your monthly payments are still mandatory. That said, youre allowed to work as an eligible medical professional in more than one remote or under-served community and with multiple employers if you perform at least 400 in-person hours over a maximum period of 12-months.
On Average Student Debt Makes Up Half Of Total Debt For Bankruptcy Filers That Carry It
For the 32% of bankruptcy filers that carried student loan debt, student loans made up 49% of their total debt on average.
This is the most concerning datapoint from the entire report even if those that carry student loan debt get all of their other debts successfully discharged in bankruptcy, they will still be on the hook for essentially half of their debt.
The purpose of bankruptcy is to help individuals with financial hardship clear their debt so they can begin recovering without having to worry about making large monthly payments toward repayment that will drain their bank accounts.
But this process is rendered partially useless for those consumers that carry student loan debt because it is so difficult to discharge in bankruptcy in addition to the fact that student debt typically makes up the largest portion of their debt.
In these instances, student debt-ridden consumers are not getting financial restarts through bankruptcy, but a continuance of their issues with no end in sight as long as those student loan payments keep commanding an untenable portion of their income.
But luckily, recourse may be in sight for people in this situation.
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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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.
Likelihood Of Discharging Student Loans
Why Is It So Difficult To Discharge Student Loans?
In 1976, Congress prohibited federally guaranteed student loans from being discharged in bankruptcy except under conditions of undue hardship. This was in response to largely unfounded fears of too many student debtors looking for an easy way out of their obligations.
This put student loan debt in the same category as financial obligations like child support, alimony and criminal fines.
In 2005, Congress added private student loans to the list of debts that cannot be discharged.
In most bankruptcy cases, consumers dont even attempt to have student loans discharged. Instead, their lawyers focus on other issues such as .
Austin said that less than 1% of bankruptcy filings include student loans, even when there is a compelling case. He cited a situation in which a single mother on a teachers salary and battling cancer didnt bother filing for bankruptcy, despite more than $150,000 in student loan debt.
However, in most cases, the legal hurdles that have to be overcome are so daunting that most lawyers advise their clients not to seek a discharge for student loan debt in their bankruptcy filing. Also, there are now several income-driven repayment plans such as Pay As Your Earn , Repay As You Earn , Income Contingent Repayment and Income Based Repayment that most borrowers should be able to find a program they can afford.
Surprisingly, about 40% of the cases that are filed, actually are successful.
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Home Mortgage And Other Property Liens
If you have a lien on property, such as a home mortgage, you cannot have the mortgage discharged in bankruptcy.
State laws vary, but you can generally keep your home in bankruptcy if you keep making the payments and if you do not have more equity in the home than you are allowed to keep by state law.
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.
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Does Repaying The Student Loan Present An Undue Hardship
The undue hardship test, or the Brunner test, is used by most courts to determine if you can discharge a student loan in bankruptcy, whether it is a private loan or a federal loan.
Under the undue hardship test, you have to prove that:1. If you are forced to repay the loan, you wont be able to maintain a minimum standard of living for yourself and your dependents 2. Your current financial situation will continue for a significant portion of the repayment period and3. You made a good faith effort to repay the loans before you filed bankruptcy.
The undue hardship test is very difficult to meet. The specific facts and circumstances of your case will be very important. Some facts that have allowed student loans to be discharged are long periods of unemployment that is expected to continue, long periods of low income, large medical debts and mental illness.
Your attorney will have to file a lawsuit in your bankruptcy case against your student loan lender and ask the judge to find the undue hardship, and rule that your student loans can be discharged. You should talk with your attorney about the case law in your jurisdiction, when the courts have found student loans to be dischargeable, and whether your case is similar.
Additional Defenses For Private Student Loans
Private student loans have other requirements that they must meet in order to be non-dischargeable in bankruptcy. First, the loan must be a qualified education loan, as defined by section 221 of the Internal Revenue Code of 1986. In order to be a qualified education loan, it must come from an eligible education institution. The Department of Education puts out a list each year of the schools that qualify as eligible education institutions. If your school was not on the list for the year that you took out the loan, the debt will not be considered a student loan and can be discharged.
Your attorney should also look at what you used the student loan money for. If the loans were used for something other than a qualified higher education expense, such as tuition, books, fees, or supplies, a portion of your private loan may be discharged.
These types of defenses must also be presented in a lawsuit that is filed within your bankruptcy case. Again, talk to a qualified attorney before taking on the expense of trying to discharge a private student loan.
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