What Happens to Student Loan Debt in Bankruptcy?
When debt becomes overwhelming, bankruptcy may be an option to help a person gain control of their finances and start fresh. The Law Offices of Adam C. Gomerman can help with your student loan questions as it relates to bankruptcy. A bankruptcy can often provide relief and potentially a discharge of many types of debt. However, those with high student loan payments are not always able to get relief. In general, student loans are not often considered for discharge. To receive any kind of relief from student loans in bankruptcy court, a person would have to prove that paying these loans would cause an undue hardship before this relief could even be considered. In these situations, the assistance of an attorney is often recommended to help ensure the right information is provided to the bankruptcy courts to ensure consideration for this debt is taken.
Student Loan Debt and Chapter 13 Bankruptcy
For many people with a regular income and high debt, Chapter 13 bankruptcy is the option they choose to find relief. Chapter 13 provides a method for consumers to have their bills reorganized and provides an affordable payment plan over the next three to five years. Often, the remaining debt can be discharged after the repayment period. However, bills considered non-dischargeable cannot be wiped out. Student loans are considered this type of debt.
In chapter 13, student loans are considered non-priority unsecured debts, similar to credit cards and medical bills. During the repayment period, student loans will receive a pro-rated share of the amount of payments provided for unsecured bills. However, when the repayment plan is over, the payments must continue for the student loans. Although chapter 13 cannot have the loans discharged, it can provide some relief during the repayment period and can provide lower payments at the end of the bankruptcy plan.
Student Loan Debt and Chapter 7 Bankruptcy
Chapter 7 bankruptcy is reserved for those with little or no income. A means test is often utilized to determine if a person qualifies for chapter 7. This means test helps to keep those with high incomes from using this type of filing. The means test will examine financial records, expenses, and the amount of unsecured debt. If the means test is passed, consumers can file for chapter 7 by providing all of their income and expenses. Any non-exempt property is sold to pay down money owed. At the end of the proceedings, any remaining money owed is discharged. However, student loans are considered non-dischargeable and will not be discharged in this filing.
In general, student loans are not considered for discharge in any type of bankruptcy filing. However, there are exceptions to this rule. Although it can be very difficult to prove in court, if a consumer can prove that paying the student loans will cause undue hardship to them or their dependents, it may be possible to have the loans discharged. An attorney is able to help many consumers with this process. They can guide a person through the process and help them determine if this option is available to them.
Student Loan Debt, Bankruptcy, and The Undue Hardship Exception
The only method for having school loans discharged in the chapter 7 proceedings is to prove that it would cause undue hardship to the consumer and their dependents. This is very difficult to prove and most people that apply for an undue hardship exception are denied. The burden of proof falls solely on the person filing. There are two types of tests that most courts use to determine an undue hardship. These tests are the Brunner test and the Totality of the Circumstances Test. A lawyer is best suited to provide assistance in these types of cases. They can help consumers determine which test their state utilizes for school loans and can guide consumers in finding the information needed to prove their case under the specific test. This can help ensure that their hardship is considered in the court hearing.
Student Loan Debt, Bankruptcy, and The Brunner Test
For courts that utilize the Brunner Test, consumers have the possibility of having their school loans discharged if they meet all three factors involved in this test. First, the consumer must prove poverty. This is proven by showing evidence that with their income and expenses, they are unable to maintain a minimal standard of living for themselves and their families if they are required to pay their loans. Persistence is the second part of this test. It must be proven that this poverty situation is going to continue for at least a large portion of the repayment period. Finally, the consumer must also prove good faith. This means that they must show evidence that they provided a good faith effort to repay their school loans. If all three of these elements are not met, the loans cannot be discharged. A lawyer can assist clients in determining if they meet these elements.
Student Loan Debt, Bankruptcy, and The Totality of the Circumstances Test
In the Totality of the Circumstances test, more details can be considered in determining undue hardship. This test will consider a person’s poverty situation and whether that situation will last for the greater portion of the repayment period. However, this test does not consider the good faith portion of the Brunner test. In addition to those two aspects of the consideration, the courts will consider the person’s past, present, and future financial situation, as well as any information that may affect a person’s ability to repay the loan. This can include medical and disability costs of the consumer and their dependents. In the courts that allow this test to be utilized, consumers have more options to prove their case.
Other Situations That Can Affect Your Student Loans During Bankruptcy
Those with school loans may have additional options for relief. If the loan was for a vocational or trade school, there may be a defense for dismissing the loans. These defenses can include unfair practices or fraud. Although government loans provide income driven repayment options and disability discharge options for those in these situations, many private lenders do not. If the loans are from a private lender that does not allow these options, the consumer may have more options to have these loans discharged.
The best method for finding information about whether a loan can be discharged is to discuss the situation with an attorney. A lawyer is experienced in these types of issues and can provide information needed to determine if discharge is possible. An attorney can also assist in representing the case in court to ensure proper consideration is given.
To speak with an attorney today regarding your questions about bankruptcy, student debt, or any other financial hardship, contact The Law Offices of Adam C. Gomerman today.