The Undue Hardship Exception
To have your student loan discharged in bankruptcy, you must demonstrate that it would be an undue hardship for you to pay them. The test for determining undue hardship varies between courts. Also, many courts look at the undue hardship test as all or nothingeither you qualify to get the whole loan discharged, or you don’t. Other courts have discharged a portion of a debtor’s student loan.
Regardless of the test used, most courts are reluctant to discharge a student loan. However, if you have very low income or your loan is from a for-profit trade school, you might have a better chance.
Will I Lose Student Loan Eligibility If I File For Bankruptcy
A college education is a massive expense. According to the College Board, the average cost of tuition, fees, room, and board from 2014 to 2015 was nearly $42,500 for a private four-year college. Four-year public schools didnt fare much better, with an average price tag of about $33,000 for out-of-state and close to $20,000 for in-state. When faced with such a staggering bill, the overwhelming majority of students and/or parents will have to take out a loan. But what if you have a bankruptcy in your past? Will you lose student loan eligibility? Our Allentown bankruptcy lawyers explain some of the factors students and parents should consider.
Option : File Bankruptcy
Bankruptcy is a legal process that helps you get relief from some or all your debt. This does not always include student debt, so you have to strategically declare bankruptcy if youâre trying to eliminate your student loans and stop wage garnishment.
Filing a chapter 7 or chapter 13 bankruptcy stops wage garnishment the day your bankruptcy case is filed. However, bankruptcy does not get your loans out of default. Nor does filing bankruptcy, by itself, allow you to discharge your student loan debt.
Almost anyone can file bankruptcy, but it will ruin your credit report for 7 years. Donât take this path lightly. However, it may prove to be your best option in some cases.
To get rid of your student loan debt in bankruptcy, youâll need to file a student loan adversary proceeding and prove undue hardship. If that sounds complicated, donât panic. Talk to a student loan lawyer.
Benefits of filing bankruptcy: This can help alleviate student loan debt for people who cannot afford a settlement, those with a disability that prevents them from working full-time, or individuals who canât get their professional license due to student loan debt.
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How Will Chapter 7 Bankruptcy Affect My Credit
Chapter 7 bankruptcy is the most common bankruptcy filing type in the United States. A chapter 7 bankruptcy does not involve a plan of repayment like a chapter 13. Instead, in chapter 7, the bankruptcy trusteean individual appointed to oversee bankruptcy caseswill gather and sell a debtors nonexempt assets and use the proceeds of such assets to claims under the provisions of the bankruptcy code.
Chapter 7 bankruptcy filings are typically much quicker than chapter 13 filings. It takes only 3-6 months from the moment you file to relief from your debts. While its true that a chapter 7 bankruptcy stays on your credit report for up to 10 years, missed payments, defaults, repossessions, lawsuits and other negative marks on your credit can be just as detrimental to your credit and your reputation.
During a chapter 7 bankruptcy, you will lose property that you own that is not exempt from sale. This means that you will lose some of your luxury possessions. However, some exemptions allow you enough so that most things you own will be exempt from bankruptcy. Also, you will get to keep the salary or wages you earn and the property you buy after your chapter 7 bankruptcy filing.
The Student Loan Bankruptcy Myth
It is very difficult, but not impossible to discharge student loan debt in bankruptcy. In limited cases, you can get your student loan discharged when filing bankruptcy. According to a study published in the American Bankruptcy Law Journal, at least 40 percent of borrowers who include their student loan debt in their bankruptcy filing end up with some or all of their student debt discharged.
Sadly, according to the same study ?99.9 percent of bankrupt student loan debtors do not even try to discharge their student loans.? More student loan debtors should try to include their debt from student loans in their bankruptcy filing, especially in light of a new amicus brief filed by the NCLC and NACBA seeking to lessen the burden of debtors trying to discharge student loans based on undue hardship.
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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.
Can You Get Student Loans After Filing Chapter 13
Debtors can get student loans after filing their chapter 13 bankruptcy petition. They can get student loans for themselves or borrow student loans for their children . But before they can accept the loan proceeds, they have to get the bankruptcy court’s permission.
You make your request to borrow student loan debt by asking your bankruptcy lawyer to file a motion seeking to incur debt. You’ll need to provide them with the loan payment terms . It is up to the chapter 13 trustee and, in turn, the judge to approve the motion.
Note. If you’re a parent, your bankruptcy filing will not stop your child from qualifying for Federal Student Aid. Your child remains eligible to receive grants, scholarships and borrow education loans in their own name. However, you may lose the ability to qualify for a Parent Plus Loan or a private student loan due to your adverse credit history.
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What Can I Do About Defaulted Private Student Loans
Private student loans donât have the same protections and repayment options as federal student loans. The options available for private loans are up to the lenders and the loan terms the borrower agreed to when taking out a loan.
A private lender may offer some type of rehabilitation program or way for borrowers to catch up on missed payments. Contact your private loan lender to discuss options you might have to get your private student loan out of default.
Refinancing student loans is another way to get loans out of default status. You can refinance private or federal student loans . A refinanced loan is a new, private loan that pays off your original loans and leaves you with one monthly payment to make moving forward. Refinancing can pay off loans that are in default status, but it canât remove any of the negative reporting on your credit report that already exists. Eligibility for refinancing one or more student loans depends on your credit score and overall creditworthiness.
Common Types Of Student Loans
The answer to whether youll be disqualified for student loans depends on which type of loan youre pursuing. Some of the most common types of student loans include:
- Perkins Loans These are low-interest federal loans meant for low-income graduate and undergraduate students. In 2014, Perkins loans were capped at $27,500 for undergrads and $60,000 for grad students.
- PLUS Loans These are federal loans meant for grad students and the parents of undergraduates. These loans come from the U.S. Department of Education, and are capped at the total cost of attendance .
- Private Loans Private loans come from lenders like banks and credit unions.
- Stafford Loans These are federal loans. Subsidized Stafford loans are meant for undergrads, while graduate students must take out unsubsidized Stafford loans. Students apply for Stafford loans by completing and submitting FAFSA .
Perkins loans and Stafford loans are based on financial need, not credit history, which means that prior bankruptcies will not have any impact on loan eligibility. Unfortunately, the same cannot be said of private loans and PLUS loans.
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Popular Misconceptions Theres Nothing You Can Do About Student Loan Debt
One of the biggest misconceptions about student loans is that it is impossible to have these loans discharged in bankruptcy, she points out.
Most attorneys will even tell you that. While the path to discharge is challenging, it is possible and I accomplished this for myself, she says, adding, Do not trust student loan resources, and even student loan lawyers, who tell everyone to forget about filing bankruptcy. Either they are poorly informed, or have an agenda which is not in the debtors best interest.
New Legislation Might Help
In December 2020, Senator Elizabeth Warren and others introduced the Consumer Bankruptcy Reform Act of 2020, which would allow courts to discharge student loans. The bill would make a simple but powerful change. It would get rid of the part of the Bankruptcy Code that exempts student loans from discharge. Afterward, student loans would be like any other type of debt.
Will the bill become law? Well see. Chances of bankruptcy reform are higher now that Joe Biden is president and Democrats control the House and Senate.
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Overview Of An Adversary Proceeding To Discharge Student Loans In Bankruptcy
It doesnât matter what type of bankruptcy is filed. Student loan borrowers in both Chapter 7 and Chapter 13 bankruptcy can bring an adversary proceeding against to discharge student loans. But, since Chapter 13 bankruptcy requires a payment plan and involves filers with a monthly income sufficient to make monthly payments, showing undue hardship is more difficult.
The purpose of the adversary proceeding is to show the bankruptcy court that your current income isnât enough to maintain a minimal standard of living while having to make student loan payments. If you can make this showing, the bankruptcy discharge will give you a true fresh start by wiping out your student loan debt.
Why do people say student loans canât be discharged in a bankruptcy proceeding?
Because itâs not automatic like it is for credit cards or other personal loans. It takes an extra step, and bankruptcy courts have often made it hard for student loan borrowers to discharge student loans. Thereâs the Brunner Test, for example, which requires you to show that youâve made a good faith effort to pay back your loan.
If you havenât made student loan payments, that can be held against you, even if you had a deferment. You also have to show that your inability to make student loan payments will continue for a significant portion of the repayment period for the loan.
How Student Loan Bankruptcy Works
If youre considering student loan bankruptcy, falling behind on your payments will have had a major impact on your life. Perhaps your wages have been garnished because a lender took out a judgment against you. The federal government may have kept your tax refund and applied it to your federal student loans because they were delinquent or in default.
Your student debt is probably just one component of the financial challenges you are currently facing. In fact, if student debt is your only problem, you are unlikely to succeed in getting it discharged through bankruptcy. Filing for student loan bankruptcy is not easy and does not guarantee that you will walk away debt-free. But if your credit is shot, bankruptcy could be a faster path to financial health than continuing to struggle to pay your debts.
There is no special type of bankruptcy called “student loan bankruptcy.” Succeeding in having student loans discharged through bankruptcy involves filing Chapter 7 or Chapter 13 and then taking an additional step, which is filing an “adversary proceeding,” or AP. The AP must be filed to have your student loans considered for discharge.
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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.
Why Is It Called The Brunner Test
Named for the case in which it was first used, Brunner v. New York Higher Education Services Corp., the Brunner test is a three-part system used to determine whether or not a debtor is suffering from undue hardship, and cannot make student loan payments as a result.
The Brunner test is a complicated and often confusing process, and using it to establish undue hardship can be quite difficult. What makes things particularly confusing is that the Bankruptcy Code fails to actually define undue hardship, leaving this decision up to the courts.
The so-called âBrunner Ruleâ states that student loan debts are only dischargeable under extreme, and very specific, conditions. Although proving undue hardship under the Brunner rule can be difficult, partial discharges on student loans are more common. In some cases, student loan borrowers will be denied any discharge of federal or private student loans, but will be granted a lower interest rate, deferment, or an extension on the repayment period of student loans.
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What To Do Before Filing Bankruptcy
If you plan to file a bankruptcy or consumer proposal, you can stop paying your credit cards and other unsecured debts while your paperwork is being finalized. This is not something you want to do months before, or if you are uncertain about filing.
If you plan to keep your financed vehicle or home, you can do so as long as you maintain your payments. If you want to get out from an expensive car loan or lease, you can do so by voluntarily surrendering your vehicle and prior to filing bankruptcy.
We also generally recommend you open a new bank account prior to filing. This is especially important if you owe money where you bank. Filing insolvency will not stop your bank from using their legal right of offset to take money from your account if you owe them money. Its also a good way to ensure that automatic payments on debts to be forgiven in your bankruptcy or proposal do not go through before the creditor processes any notice of your filing.
If you would like to learn more about how a bankruptcy or consumer proposal works, talk with a Licensed Insolvency Trustee today.
Proving Undue Hardship Of Student Loans
To get rid of student loan debt during bankruptcy, you have to prove it would be an undue hardship to repay. Whats an undue hardship? It means its tough, if not impossible, for you to repay the loans.
The bankruptcy court will probably use the Brunner test:
You have to prove each factor by a preponderance of the evidence, which means it is more than likely true. You should talk with an Ohio bankruptcy attorney about how much evidence you need to prove each element. You should also ask about the types of facts that work against you.
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Private Student Loan Bankruptcy Issues
If your student loans are private bank loans like a student line of credit or student credit card debts, then these types of consumer debts are eligible for automatic discharge under the BIA no matter how old they are. This is true for student loans that are not guaranteed by the Ontario or Canadian government. Private student loan debt in bankruptcy is treated like any other unsecured consumer debt. It is automatically discharged with no waiting period. If you are unsure about whether your private student debt qualifies for elimination through a bankruptcy or consumer proposal, book a free consultation with one of our Licensed Insolvency Trustees to talk about your situation.
Can Bankruptcy Stop Millennials From Seeking Better Employment Opportunities
Federal, state and local government agencies cannot consider your bankruptcy when deciding whether to hire you. However, private employers do not have the same constraints. In fact, private employers are likely to conduct a credit check and find out about your bankruptcy. How heavily the results of your credit check influence potential employers typically depends on the nature of the position.
Those who are interested in positions that handle money are more likely to have a difficult time finding employment in their field post-bankruptcy. For example, your bankruptcy may prohibit your employment in companies hiring for positions in banks, bookkeeping, payroll, and accounting.
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