Full Guide to Student Loan Bankruptcy

Student loans are considered nonpriority debts though one may still have difficulty discharging them according to Chapter 7 or 13 of bankruptcy laws. In this case, the exception is if one can prove that the debt from the student loan has caused hardship to the family and dependents. Considering the bankruptcy code does not cover undue hardship comprehensively, it is left open to judicial interpretation. That may make it hard to determine if the loans are dischargeable. It also allows judges to decide these cases according to the situation. 

Filing Bankruptcy for students: Chapter 7 vs. Chapter 13

According to Chapter 7 of the bankruptcy code, the trustee may sell non-exempt assets. Those exempt assets vary by state, though they typically include the home, possessions, and vehicles. Trustees utilize the proceeds to pay creditors for as much as the debt as possible while the court arranges for the discharging of the rest. In order for a person to file Chapter 7, though, they must have not filed a previous one in the past eight years. The current monthly income of the applicant should also fall under the state’s median income, or it must be able to pass a financial means test. That said, certain debts, such as alimony and child support, cannot be discharged. 

Chapter 13, though, is when an individual cannot pass the Chapter 7 means test. They may also file for this option if they do not want to lose a home to foreclosure processes. Chapter 13, though, means creating a financial repayment plan which utilizes 100 percent of the debtor's disposable income of the debtor to repay the creditors in three years. The repayment process is supervised by a trustee who collects a payment each month directly from the debtor before redistributing that money to that person’s creditors as is outlined in the bankruptcy plan. 

How Does Student Loan Bankruptcy Work?             

A discharge of student loans happens at the end of the bankruptcy process. The first thing is to find a bankruptcy lawyer. Though an attorney may not be necessary, working with someone with some experience in this field can assist one in navigating it better. Filing for bankruptcy may cost the individual a few hundred to several thousand dollars. That depends on the applicant's location and the complexity of the case. It is not likely for an individual to qualify for student loan discharge if they can at least afford an attorney.

The next step is to file for chapter 7 or 13 depending on the situation. In Chapter 7, the defaulter sells some of their assets to pay off as much of the eligible debt as possible with what is left over. That means passing a means test also to qualify for Chapter 7 bankruptcy. For chapter 13, which is also referred to as personal reorganization bankruptcy, allows one to reorganize their debts such that it is possible to make affordable monthly issuances over three to five years. Eligible debt, though, that is not paid off will be discharged. It may take more time to go ahead with this alternative, but it can have a minor effect on the individual's credit history. 

Erasing student loans by filing for bankruptcy would require an additional adversary proceeding lawsuit. When doing this, a bankruptcy lawyer can file a written complaint that outlines the case. The case can be litigated until the judge comes up with the outcome. That can be a full, partial, or no discharge provided. 

3 Common Factors of DOJ

Hardship factors for student loans are addressed in the following manner.

Present Ability to Pay- the use of existing standards developed by the Internal Revenue Service and the data that the defaulter submits. The Department of Justice will assess the expenses and compare them to the debtor's income from this information.

1. Future Ability to Pay

The Department can also evaluate if the current inability of the debtor to pay is temporary or will persist. It will presume that circumstances will likely remain the same if they have a disability or chronic injury. If similar factors are absent, the attorney will assess facts illustrating if the debtor's inability to pay will continue.

2. Good Faith Effort to Repay

The Department attorney will also determine if the debtor came forward to discuss with the loan servicer about payment options. They will also assess their reasonable efforts to manage expenditures, earn income and repay their loan. Debtors are not to be disqualified if there is evidence of good faith.

3. Courts Determination of Undue Hardship

The bankruptcy courts can determine undue hardship if making student loan payments keeps the individual from a minimal standard of living, considering their income at the time. There should be necessary expenses only, though. They may also rule in favor of the current circumstances, showing that the financial situation will likely remain the same for a significant part of the remaining loan period. Good faith efforts towards loan repayment can also persuade the courts to determine undue hardship with the other elements considered. 

Should You File for Student LoanBankruptcy?

Though it is possible to get the student loan discharged, as per bankruptcy application, there are difficulties in meeting the requirements. Before consideration of bankruptcy, one must explore the options for relief like deferment, student loan forgiveness, and income-driven repayment.

Student loans are currently some of the most significant financial stressors, primarily if the debtor cannot repay them. According to the bankruptcy code, it is possible to apply for it to be discharged. That is because student loans are counted as non-priority debts. Regardless of whether a person files Chapter 7 or 13, they will still have a hard time getting the loan discharged.

In this case, the exception is if one can prove their debt has caused undue hardship to themselves and any dependents. For this reason, the Brunner test is applied by the Justice Department lawyers. It assesses if the individual's situation entails poverty, the persistence of their circumstances, and if there has been good faith. Should most or all three be the case, the loan can be discharged. However, the debtor should also seek other approaches for relief, including deferment or student loan forgiveness.