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.
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.
Havent There Been Cases Where People Still Got Rid Of Their Students Loans Through Bankruptcy
Absolutely. Though difficult, it is still possible to have student loans discharged through bankruptcy by meeting the undue hardship requirement. A 2011 study found that only 1 in 1,000 student loan borrowers who declared bankruptcy even tried to have their student loans discharged. However, those that did succeeded at a rate of 40%.
Section 523 of the Bankruptcy Code does not set out a specific test to determine what qualifies as undue hardship. The federal courts are split on what the appropriate standard should be for discharging student loan debt. The Second Circuit case, Brunner v. New York State Higher Education Services Corporation, established three requirements that determine whether undue hardship applies.
First, the borrower must demonstrate that if forced to repay the student loans, they will be unable to meet a minimal standard of living based on income and bills.
Second, the borrower must be unable to repay for a significant portion of the repayment period.
Third, they must have made good-faith efforts to repay the student loan.
If a bankruptcy court agrees that a borrower meets these three requirements, the court can discharge the student loan debt.
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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.
Which Student Loans Stay
When it comes to student loans, the date is all-important.
If you stopped being a student within seven years of the date that you file bankruptcy or a consumer proposal, any student loans from that time will remain, and you will still be responsible for paying them.
When you are considered to no longer be a full-time or part-time student might not be as clear cut as you think.
The date that you think you stopped being a student could be different from the official date that is used, which could make things tricky if it has been around seven years since you finished your education.
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Will Filing For Bankruptcy Affect My Job
You cant be fired for declaring bankruptcy. Your employer must have a valid legal reason for terminating your employment.
You may be wondering how your current employer would even discover your filing status. If your wages have been garnished, your employer will receive a notification of your bankruptcy petition. Because once you file for protection from your creditors, all collection efforts and wage garnishments stop.
When it comes to finding a new job, some employers will run a credit check on you but bankruptcy shouldnt be a determining factor for most types of employment even for a role that requires security clearance. Youre most likely to have an issue if you are applying for a position that requires handling money.
Being upfront with a potential employer about what they will discover on your credit report might help mitigate any issues.
What Type Of Debt Is Medical Debt
Medical debts fall under the non-priority unsecured debt because theyre not secured by collateral. Lenders must take legal action, win the lawsuit, and secure a judgment before they can take your property to pay your medical bills. Whether you file a Chapter 7 or Chapter 13 bankruptcy, medical debt goes at the bottom of the list of debt that needs to be repaid. In most cases, medical debt is discharged, which means it doesnt get repaid at all.
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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.
When To File An Adversary Proceeding: Chapter 13
In a Chapter 13 bankruptcy, when you can file an adversary proceeding also depends on the bankruptcy court rules where you live. Regardless of when you file, your student loan nightmare will not be complete if you win the adversary proceeding. That’s because you have to wait until you’ve completed the necessary Chapter 13 plan payments and earned your discharge order for your other debts before your student loans will be discharged.
If you are allowed to file the AP early in your case, you might get the proceeding over with sooner and obtain a decision on your student loans. The table below compares Chapter 7 and Chapter 13 bankruptcy.
|Comparing Bankruptcy Options|
|Varies by state|
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How Is Medical Debt Treated In Bankruptcy
Bankruptcy laws handle debt in different ways depending on whether it is secured or unsecured. Certain priority debts, such as taxes, child support, and alimony, cannot be discharged through bankruptcy. Secured and unsecured debts, however, can be reduced or wiped out completely through bankruptcy.
Secured debt are loans backed by collateral, or tangible property such as a car or home. So, your home mortgage or car loan are secured debts. Secured debts have priority over unsecured debts in bankruptcy.
Unsecured debts are not secured by collateral. Examples are credit card bills and medical bills. They have the lowest priority in bankruptcies. So, they can be eliminated entirely in bankruptcy depending on the type of bankruptcy you file.
Proving Undue Hardship In Student Loan Bankruptcy
For now, the burden is on borrowers to establish their qualifications for undue hardship that satisfy the court theyre in front of. While it might seem easy to prove financial dire straits, that isnt always the case, according to Michael Fuller, a bankruptcy attorney.
You have to be in a somewhat extreme situation, Fuller said. It is often people who are sick, people who are on disability or people who have an extreme financial situation that is not going to improve.
For instance, Fuller said he recently worked pro bono with a single mother of four kids who owed several hundred thousand dollars on student loans. While she was employed, the woman was unable to make payments on her loans. When filing bankruptcy on her student loans, Fuller was able to demonstrate the debt caused undue hardship for her and her dependents and had her outstanding loans discharged.
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Student Loans A Lot Like The Subprime Mortgage Debacle Watchdog Says
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. Theyre 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.
Student Loan Debt And Your Options
If you have ceased to be a student for more than seven years when you file bankruptcy, your student loan will be automatically discharged along with all of your other debts, unless a creditor objects.
If seven years have not passed, you have the following options:
You should contact a licensed bankruptcy trustee to review your options and determine how your student loan will impact your bankruptcy.
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If You Need Additional Student Loan Help
If youre struggling with your student loan debt, first speak with your servicer or lender to:
Discuss repayment options.
Take a temporary payment pause.
Temporarily reduce your monthly payments.
If your problem is with your lender or servicer or youre not getting the help you need, look for a legitimate student loan help organization that offers counseling. Consider these vetted resources for student loan help they are established organizations with verified histories:
Student loan help resource
Advice on debt settlement, bankruptcy, default and forgiveness. Licensed in Missouri and Illinois.
Many of these organizations offer advice for free. In some cases, you may need to pay a fee, as with a certified nonprofit credit counseling agency or if you hire an attorney.
None of the organizations above calls, texts or emails borrowers with offers of debt resolution.
Offers of help that you have not sought out are likely to be scams. While its not illegal for companies to charge for services such as consolidation or enrollment in a payment plan, those are steps you can do yourself for free.
Avoid any debt relief companies that demand money upfront.
Bankruptcy And Financial Aid
This page answers common questions about the relationship between bankruptcy and financial aid, such as student loans. The first answer concerns the impact of bankruptcy on eligibility for student loans. The second answer discusses whether student loans can be discharged through bankruptcy.
Thanks to Pat Somers of the Univ. of Arkansas at Little Rock and Art Bilski of the Illinois Student Assistance Commission for their assistance with this section.
Bankruptcy and Eligibility for Financial Aid
Will a bankruptcy affect a students future eligibility for student loans and other financial aid?
The answer to this question is a complex one because several issues are involved. It depends on the nature of the student loan programs and the type of bankruptcy.
Whatever the circumstances behind the bankruptcy, the student should talk with the financial aid administrator at the school he plans to attend, and explain the situation. The financial aid administrator may be able to guide the student to certain loan programs or lenders that may fit his needs.
Generally speaking, a bankruptcy should have no impact on eligibility for federal student aid.
The anti-discrimination rules appear in 11 USC 525:
Discharging Student Loans Through Bankruptcy
- if the borrower files an undue hardship petition
Types of Bankruptcies
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Student Loans & Bankruptcy In Canada
If you file bankruptcy in Canada a federally guaranteed student loan is only automatically discharged if the date of your bankruptcy is more than seven years from when you ceased to be a student. This rule was created to prevent student from incurring huge student loans, and then graduating and immediately going bankruptcy. You can read more about the legislation and how it works at student-loan-bankruptcy.ca
Please note that the seven year clock does not start when you get the student loan it starts when you cease to be a student, which generally means when you graduate from school, or when you stop attending and leave school. It is the end of study date that matters, so you should contact your student loan lender to find out your exact end of study date.
Your Childrens Bank Accounts
Money held in trust for your child is not property of the bankruptcy estate. For instance, if you are the custodian of a bank account set up under the Uniform Gifts to Minors Act or the Uniform Transfers to Minors Act, this money is not your money and you cannot withdraw this money for yourself. Consequently, neither the bankruptcy trustee nor your creditors can get to this money because it legally belongs to your child.
Be advised that any money you transfer into a minors bank account before filing bankruptcy is looked upon with suspicion. If you are insolvent at the time you make the transfer, the Chapter 7 trustee can usually get this money.
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Speak With An Attorney
Speaking with a professional bankruptcy lawyer will be the best option before you file for bankruptcy. It is important to understand that when youre seeking out loan forgiveness.
Many debtors are not aware that their student loans have the possibility of being forgiven, so they dont even bother asking an attorney or seeking out any information about student loan forgiveness.
An West Palm Beach bankruptcy attorney can help you find take the necessary steps in requesting forgiveness from your student loan debts. Unfortunately, you cannot file this request along with a normal bankruptcy case.
Can Student Loans Be Cleared Through Bankruptcy 4 Questions Answered
For decades, student loans have mostly been prohibited from being discharged through bankruptcy proceedings. That could change under the FRESH START through Bankruptcy Act. Here, public policy scholars Brent Evans and Matthew Patrick Shaw, both of Vanderbilt University, explain why student loan debt cannot usually be cleared through bankruptcy and how that might change if the proposed bill becomes law.
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