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.
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.
Debts That Are Difficult To Discharge In Bankruptcy
Student loans are notoriously difficult to discharge through bankruptcy; it is only possible if you can demonstrate undue hardship to yourself or your dependents, such as being unable to maintain a minimal standard of living. In some cases, a court may discharge part, but not all, of your student loan debt. If student loan debt is a major reason for your considering bankruptcy, contact your loan servicer first and see if itâs possible to negotiate a repayment plan that would work for you. In the case of federal student loans, for example, several repayment plans are available.
You cannot have income tax debts discharged without a special exemption, which can only be obtained by petitioning the bankruptcy court and explaining why you deserve relief. So if you have income tax debts that you cannot repay, then you may be better off consulting with a tax attorney to discuss your options before filing for bankruptcy.
In the case of federal taxes, for example, the Internal Revenue Service can offer several alternatives to people who are unable to pay what they owe. One is an offer in compromise, in which the IRS agrees to accept a lesser amount. The IRS may also arrange for a payment plan, or an installment agreement, that will allow you to pay your taxes over an extended period of time.
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The 7 Year Student Loan Rule Explained
Its not the date of the loan that matters; its when you ceased to be a student that is the relevant date.; If you get a loan in 2002, and graduate in 2006, the seven year time period starts in 2006, not 2002.; In this example you would need to wait until 2013 to declare bankruptcy in Canada and have your student loans eligible to be automatically discharged along with your other debts. ;A word of caution: ;The seven year rule means that you must not have attended ANY school for the past 7 years. ;Even one part time class will result in your student loans ;not being automatically discharged in your bankruptcy.
Consider Consulting With An Attorney
You’ll find the Brunner test or other standards applied to Chapter 7 and Chapter 13 debtors in lots of court cases. Knowing how the court in your jurisdiction ruled previously could help you determine the likelihood of your success.
If you have a substantial amount of student loan debt, it might be worthwhile to consult with a local bankruptcy attorney. The chances are that if you decide to litigate either the dischargeability issue or assert a defense to the loan in bankruptcy court, you’ll need an attorney to represent you.
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Preparing For The Adversary Proceeding
The court will look at a number of factors in determining undue hardship. One factor it will likely consider is whether you made a good-faith effort to repay your loans. That good-faith effort may include trying to rearrange your payment schedule. If you havent already, contact your loan servicer and ask about alternative payment plans. You could end up reducing your monthly payment amount or even postponing making payments altogether.
If your lender refuses to adjust or pause your payments, document whom you spoke to and the date and time of the call. You might need to use this information as evidence in court.
You may also need to present information on your income, budget and debt burden during the adversary proceeding. In most cases, youll have already collected this material as part of the overall bankruptcy filing process.
What Happens If Student Loans Are Not Released
If, as in most cases, your loans are not released from bankruptcy, heres what happens.;Chapter 7 Bankruptcy. In Chapter 7 on bankruptcy, if repayment of your loans is not an excessive difficulty, you will still owe them after the bankruptcy case is over.
Chapter 13 bankruptcy. If you cant repay student loans, bankruptcy in Chapter 13 provides other ways that can help. For example, you will most likely be able to pay a reduced amount under Chapter 13 although you will have a problem with the remaining amount after the repayment period.
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You Should Not File Because
Bankruptcy is the most damaging event your credit can sustain, and as noted above remains known to potential lenders for ten years. If youre a college student in your twenties filing for bankruptcy, that means that well into your thirties youll have difficulty obtaining feasible loan terms for purchases like a house or even a car, although you may need transportation in order to work or want a house to start a family. If theres any hope of financial survival short of bankruptcy, try to hang on until your situation improves.
What Schools Qualify As Eligible Education Institutions
If you owe private student loans for a school that was not accredited, your loans can probably be discharged in a Chapter 7 bankruptcy right away. Even some big-time lenders still make private student loans to such unprotected organizations. Its quite common to find vocational and trade school students with these types of unprotected loans. Flight schools for pilots seem to be notoriously unaccredited, yet pilots errantly labor under hundreds of thousands of dollars of unmanageable student loans believing there is no hope for them. You can see some real case studies showing how easily these loans were discharged.
In particular the issue that makes these private student loans so easily dischargeable in bankruptcy is the fact the school was not an eligible educational institution or that the loans were for a qualified higher education expense.
The characteristics of a private student loan get even more specific. An accredited school must also have offered Title IV federal loans or the private loans may not be protected from discharge in bankruptcy.
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Benefit Of Satisfying 7
| Satisfy the 7-year waiting period form the date of the bankrupts end of their education | |
| Filing for personal bankruptcy | If you file for personal bankruptcy more than seven years after the date of the ?end of your education? then you are entitled to an automatic discharge of your outstanding student loan |
| Making a consumer proposal | If you make a consumer proposal more than seven years after the date of the ?end of your education? then you are entitled to a discharge of your outstanding student loan on the date you satisfy your obligations under your consumer proposal |
If you file for personal bankruptcy in circumstances where you do not satisfy the seven-year waiting period, you are not entitled to an automatic discharge of your student loan debt, and your bankruptcy will have no impact on your legal obligations arising from that indebtedness. If you fail to satisfy the 7-year waiting period you will, however, be entitled to have most, if not all, of your other unsecured consumer debt discharged or forgiven as a result of your bankruptcy.
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.
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Why Cant People Get Rid Of Student Loans Through Bankruptcy Now
Although not impossible, discharging student loans in bankruptcy is difficult. Due to a 1976 law, student loans are not treated during bankruptcy proceedings like other forms of debt, such as credit card debt or auto loans. This policy stems from a federal commission on bankruptcy laws, which heard testimony that claimed the easy discharge of educational loans in bankruptcy could undermine federal student loan programs. Congress was concerned that students might borrow thousands of dollars from the federal government, graduate, declare bankruptcy to have their student loans discharged and never repay their educational debt.
In an extension of the Higher Education Act of 1965, Congress passed the 1976 law, which made borrowers wait five years after the first student loan payment was due before they could have the loan discharged through bankruptcy. Congress created an exception that allowed for discharge within that five-year period if the loan caused undue hardship.
Congress extended the five-year bankruptcy ban to seven years in 1990. Then Congress extended it to the borrowers lifetime in 1998.
Currently the undue hardship exemption is the only way to have student loans discharged in bankruptcy that is a much higher threshold than many other common forms of debt. This higher threshold includes both federal student loans and, since 2005, most forms of private student loans.
Procedure To Discharge Your Student Loan In Bankruptcy
If you want to try to discharge your student loan in bankruptcy, you must file an adversary proceeding to determine dischargeability with the bankruptcy court. But that’s not all. You’ll need to present evidence and prove to the court that payment of your loans will cause an undue hardship. It’s likely that you’ll need to retain an expert to testify about your ability to be gainfully employed in the future.
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Most Back Taxes And Customs
This generally includes income taxes, Social Security taxes and penalties you owe, or unpaid withholding tax for your employees.
Although most back taxes cannot be discharged in bankruptcy, you may be able to have taxes discharged if they are for a return due 3 or more years ago and you meet certain other qualifications.
If you owe significant back taxes you cannot pay in a reasonable period of time, you may want to ask a tax attorney or other professional about an Offer in Compromise, or OIC, or other alternatives.
Bankruptcy And Student Loans
Courts generally give special consideration toward a debt incurred by a government student loan because the failure of a borrower to repay a student loan endangers the program for other students. Consequently, borrowers should be aware that it is difficult to discharge a student loan by filing for bankruptcy.
Under Canadas;Bankruptcy and Insolvency Act,;the debt incurred by a government student loan will not be released by an order of discharge, if such an order occurs either while the person is still a student or within seven;years after the date upon which the bankrupt borrower ceased to be a student. This applies equally to those who are full-time or part-time students.
In some cases, the court, upon application by the student, will release the debt earlier, at any time after five years from the date the student was discharged from bankruptcy or ceased to be a student .;In order for the court to allow the early release of the debt, the court must be satisfied that the student: acted in good faith with respect to the student loan debt; and has and will continue to experience financial difficulties to an extent that he or she will be unable to pay liabilities under the student loan.
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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.
Student Loans And Bankruptcy Rules
Lets start with a review of the current legislation governing student loan debt and bankruptcy. ;Heres what you need to know
Section 178 ;of the Bankruptcy & Insolvency Act;states that an order of discharge from bankruptcy will NOT discharge:
- ;A loan made under the;Canada Student Loans Act, the;Canada Student Financial Assistance Act;or any enactment of a province that provides for loans or guarantees of loans to students where the date of bankruptcy of the bankrupt occurred
- ;before the date on which the bankrupt ceased to be a full- or part-time student, as the case may be, under the applicable Act or enactment, or
- ;within seven years after the date on which the bankrupt ceased to be a full- or part-time student; or
In simple terms, this means that a student loan will only be automatically discharged in a bankruptcy if you wait for seven years after you finish school, and then declare bankruptcy.
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Can Your Debts Be Erased In Student Loan Bankruptcy Yes Heres How
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How Do I Delete Closed Student Loans
Removing closed student loans;from your credit report can be done two separate ways: 1. ask the creditor to;delete;the reporting of the;account;or 2. dispute the;account;with the three major credit bureuas. Having positive installment;loans, even if theyre;closed, is good for your score.
How long do Closed student loans stay on credit report?
Unfortunately, student loans that you have defaulted on or are delinquent on are going to stay on your credit report for;seven years;from the original delinquency date of the debt. Student loans are a type of installment loan, like an auto loan or a mortgage.
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Next On Your Own Or With Your Lawyer Youll Need To Decide Whether To File For Chapter 7 Or Chapter 13 Bankruptcy
Hud approved loans. Some cant explain the rationale for the student loan no bankruptcy exception but others say it grew from a concern that student loan borrowers could take advantage of bankruptcy laws borrow a. If you file for chapter 7 or chapter 13 bankruptcy and have delinquent student loan debt your student loan servicer or any debt collection agency trying to collect your loans is barred from engaging in collection efforts during your bankruptcy case. However if you cannot discharge your student loans in bankruptcy the student loan creditor can resume collection of your student loans once.
Types of bankruptcy. A discharge from bankruptcy releases you from your obligation to repay your student loans if you filed for bankruptcy at least seven years after the date you ceased to be a part or full time student. Decide which type of bankruptcy to file for.
The federal or provincial student loan legislation applicable to your loan governs how you determine the date on which you ceased to be a full or part time student. 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. If you are considering bankruptcy for student loans consult a bankruptcy attorney to determine which form is right for you.
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