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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What Qualifies As Undue Hardship
Unfortunately, bankruptcy law is unclear on what makes undue hardship.
Congress never defined what undue hardship means, Kantrowitz says. They left it up to the courts to define it.
Bankruptcy courts are free to use two different tests to decide if the borrower is experiencing undue hardship the Brunner test and the Totality of the Circumstances test. According to Kantrowitz, the Brunner test is far more widely used.
Under the Brunner test, the debtor must prove three things.
What Bankruptcy Can Do
Bankruptcy allows people struggling with debt to wipe out certain obligations and get a fresh start. The two primary bankruptcy types filedChapter 7 and Chapter 13 bankruptcyeach offer different benefits and, in some cases, treat debt and property differently, too. You’ll choose the chapter that’s right for you depending on your income, property, and goals.
Here are some of the things you can expect regardless of whether you file for Chapter 7 or 13.
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Bankruptcy Is A Powerful Tool For Debtors But Some Kinds Of Debts Can’t Be Wiped Out In Bankruptcy
By Cara O’Neill, Attorney
If you’re facing severe debt problems, filing for bankruptcy can be a powerful remedy. It stops most collection actions, including telephone calls, wage garnishments, and lawsuits . It also eliminates many types of debt, including credit card balances, medical bills, personal loans, and more.
But it doesn’t stop all creditors, and it doesn’t wipe out all obligations. For instance, you’ll still have to pay your student loans and arrearages for child support, alimony, and most tax debts. Read on to learn more about:
- what you can expect in both Chapter 7 and Chapter 13
- the benefits offered by Chapter 13 alone, and
- things that can’t be accomplished by filing for bankruptcy.
If you’d like step-by-step guidance through the bankruptcy process, read What You Need to Know to File for Bankruptcy in 2021.
Private Student Loan Bankruptcy Is Getting Easier
The truth is that it is getting easier to discharge private student loans. But itâs not automatic. Many borrowers will still need to jump through extra hoops to get a discharge.
Finding a bankruptcy attorney or law firm thatâs willing to file an adversary proceeding can be challenging. Thatâs where I come in. Iâve helped many people just like you successfully navigate filing bankruptcy on their private student loans. Schedule a free 10-minute talk so we can discuss how I can help you do the same.
Hey, Iâm Tate.
I’m a student loan lawyer that helps people like you with their federal and private student loans wherever they live.
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Can Student Loans Be Discharged In Bankruptcy
If you want your student loans and other debts discharged outright, youll need to file a Chapter 7 bankruptcy. But keep in mind theres no guarantee your student loans will be discharged unless certain other criteria are met. If you dont qualify to file Chapter 7, you may be able to restructure your student loan payments or have them discharged in a Chapter 13 bankruptcy. Once your Chapter 13 bankruptcy ends , youll be responsible for repaying your federal student loans if you werent able to prove undue hardship.
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.
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When Do Student Loans Qualify Under Undue Hardship
The criteria for demonstrating undue hardship can vary from court to court, and meeting the standard in any court can be difficult. However, there are two tests courts generally use to determine whether you’re experiencing undue hardship from your student loans. Depending on the court, there may be other tests that are used to determine whether you qualify to include student loans in your bankruptcy discharge, but these are the most common:
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Why Student Loan Debt Is Treated Differently
Over the years, Congress has decided that good reasons exist to stop people from getting rid of their debts by declaring bankruptcy. For instance, Congress has made child support, alimony, certain tax debts, and criminal restitution non-dischargeable. The need to protect those types of debts from discharge is obvious. But after the federal government decided to start offering federal loans, Congress chose to do the same for student loan debt.
Student loans became non-dischargeable in the late 1970s when Congress added Section 523 to the U.S. Bankruptcy Code. The thinking was that the U.S. Department of Education should be protected from borrowers racing to bankruptcy after graduating. Over the years, Congress has amended Section 523 to protect different types of federal loans , and Federal Perkins Loans) and private loans.
Currently, Section 523 protects a student loan from discharge absent undue hardship if:
- it was made or insured by the federal government
- it was made under a loan program funded by the federal government or a nonprofit
- it is a qualified education loan according to the IRS’s criteria
All federal student loans are protected from student loan bankruptcy discharge. However, some private loans may not be. You can read more about discharging private loans here.
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.
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How Do I Rebuild My Credit After Bankruptcy
9 Steps to Rebuilding Your Credit After Bankruptcy
Find A Bankruptcy Attorney
An experienced bankruptcy attorney can walk you through the process. Its not necessary to hire one, but bankruptcies are complicated. Consider help from a free legal clinic or legal aid society instead. The courts may decide that if youre able to afford an expensive attorney, you may be able to afford to pay your student loans off.
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Advantages And Disadvantages Of Student Loan Debt Consolidation
Here are some advantages of getting a debt consolidation loan to deal with your student loans:
- If you consolidate your government-guaranteed student loans with a bank or other lender, you will then owe the money to a bank, rather than the government. This can be a big advantage, since if you dont pay your student loan the federal government can seize your tax refunds the bank cannot seize tax refunds for non-payment.
- It may be possible to negotiate more favourable interest rates with another lender.
- Your credit rating could improve. If you have a negative credit report because of past-due student loan payments, a debt consolidation loan may allow you to get back on track and repair your bad credit.
- You may be able to negotiate to repay your debts over an extended period, potentially decreasing your overall monthly payments.
There are, however, a few disadvantages to getting a debt consolidation loan to deal with your student loans:
There are significant advantages but also some important disadvantages to consolidating your student loans. It can seem quite complicated!
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.
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Why Filing For Bankruptcy To Get Rid Of Student Loans Often Won’t Work
Here’s why, and the other options available.
Paying back student loans is not an easy thing to do. One out of every 5 borrowers with outstanding student loan debt has fallen behind their payments.
There are several ways borrowers can get help to deal with their debt burden. Bankruptcy is the most extreme. In general, the law does not allow you to get rid of student loans through bankruptcy. One exception to the rule is if a borrower can prove that paying back the loans would impose an undue hardship on and dependents. The threshold for proving that is pretty high. Plus, theres not a lot of legal guidance on what precisely an undue hardship is.
Not many people try to get rid of student loans through bankruptcy. It could be because they either dont know its an option or dont think they will prevail. One study found that only 0.1% of student loan borrowers who have filed for bankruptcy tried to discharge their student loans. Among those who do try, the success rates are high. Nearly 40% of borrowers who challenge their student debt receive at least a partial discharge.
The U.S. Supreme Court has not yet weighed in on what exactly makes for an undue hardship. However, most federal courts follow the 1987 Second Circuit decision, Brunner v. New York.
Of these three prongs, the first is the most important. Typically, a borrower has to show they have both maximized their income and reduced their expenses to cover only basic needs.
Other Forms Of Student Debt Relief
While current bankruptcy law does not allow student loans to be discharged, there are other options for debt relief. The alternatives to bankruptcy discharge have mostly occurred in the form of income-driven repayment plans, of which there are currently four. Borrowers with private student loans also have the option to refinance to get a lower interest rate.
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Can You File Bankruptcy On Student Loans
Filing bankruptcy on student loans is possible, but youll have to go through a difficult process to do so. To discharge your student loan debt through bankruptcy, you have to prove that you cant pay back your student loans without it having an extremely negative impact on you and your dependents.
Courts are left with some room to interpret your eligibility. Most, but not all, federal courts of appeal evaluate hardship using a set of standards known as the Brunner Test, which was established as the result of a 1987 federal court ruling, Marie Brunner v. New York State Higher Education Services Corp.
Can you file bankruptcy on student loans? First, can you pass the Brunner test?
|The factors of the Brunner test are outlined by the U.S. Department of Educations Federal Student Aid office and include three main points:|
Other courts, namely the 1st U.S. Circuit Court of Appeals and the 8th U.S. Circuit Court of Appeals, rely on a different standard, known as the totality of circumstances, which considers your past, present and future financial resources reasonable living expenses and other relevant factors related to bankruptcy proceedings.
Why Student Loan Debt Is Particularly Hard To Deal With
First, most student loan recipients are young, and the student loan debt they have incurred is often their first significant financial debt. Students may not have the life experience to understand how credit operates. Therefore, a student may not have considered a plan for repayment. When it comes to repaying, they are unprepared.
Second, the students ability to repay the loan is often contingent upon getting a job upon graduation. What if this doesnt happen right away?
Third, student loan debt is distinct from many other types of debt in that the option of clearing it through an insolvency solution such as bankruptcy or consumer proposal is not usually available until seven years after the student ceases full-time studies. Since lenders know that you cant eliminate the loan by filing for bankruptcy, it may be harder to negotiate favourable payment arrangements with them.
See this page from the Government of Canada for more information about student loans and bankruptcy.
Since you may not be able to get rid of your student loan by going bankrupt, student loan debt consolidation may be the correct option.
Student Loan Holder Must Prove Undue Hardship
Undue hardship is proven by the debtor meeting three criteria. Those three criteria are referred to by the bankruptcy court as the Brunner test.
The debtor will submit schedules with the bankruptcy petition that show their income and reasonable expenses. A minimum standard of living includes expenses for shelter, utilities, food and personal hygiene, clothing, health insurance or ability to pay medical and dental expensesand even some recreation. The essence of the minimum standard of living requirement is that a debtor, after providing for his or her basic needs, may not allocate any of his or her financial resources to the detriment of student loan creditor. If after paying the basics a debtor has little to nothing left over, that should meet this first criteria.
To satisfy the second criteria, the debtors financial situation must be indicative of a certainty of hopelessness, not merely a present inability to pay bills. The circumstances may include illness, disability, lack of job skills, or the existence of dependents. Finally, the circumstances must be beyond the debtors control, not borne of free choice.
For more information on this area of law, see our bankruptcy overview.
Can Student Loan Debt Be Discharged Through Bankruptcy
Current estimates place the total amount of student loan debt at over $1.2 trillion, with over 7 million borrowers in default. The average amount owed by a recent college graduate is between $26,900 and $32,600, for public and private institutions, respectively. While there are numerous repayment plans, the average monthly payment for a student-loan borrower is $200 and $300. For many former students who entered college or university with high hopes of landing a high-paying job, only to have those hopes dashed by the current job market, student loan debt is an untenable expense.
The benefit of filing for bankruptcy is to wipe out debt and begin creating a new financial future. However, not all debt is dischargeable through a Georgia bankruptcy. In fact, the general rule is that student loan debt, whether it is held by a public or private lender, is not dischargeable through either a Chapter 7 or a Chapter 13 bankruptcy.
While most filers will not be able to free themselves of student debt by filing for bankruptcy, there is an exception to this general rule. If a filer can establish that repaying their student loans would cause them to suffer an undue hardship then courts may get rid of student loan debt. Georgia courts consider the following factors when considering whether paying student loan debt poses an undue hardship on a filer:
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