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Does Filing Bankruptcy Affect Student Loans – To file for student loan bankruptcy, you must first file for Chapter 7 or Chapter 13 bankruptcy. You will then need to file an adversary proceeding (AP) to be considered for discharge of your student loans.
Student loan payments were reinstated in October 2023 after a three-year hiatus due to the COVID-19 relief legislation. If you can’t pay your bills, you can lower your monthly payments through the SAVE program. Loan forgiveness is available to certain public service employees, nonprofit employees, and individuals with disabilities.
Does Filing Bankruptcy Affect Student Loans
You can get student loan forgiveness in some cases, but the process is more complicated than with other types of debt. Filing student loan bankruptcy does not guarantee that your student loans will be discharged.
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First, you must file for Chapter 7 or Chapter 13 bankruptcy. You will then need to take the additional step of filing a counterclaim. It is essentially a bankruptcy case filed in the same court.
Falling behind on your payments can have a significant negative impact on your financial life and lower your credit score. If you can’t pay your bills and are considering filing for student loan bankruptcy, weigh the pros and cons.
Filing for Chapter 7 or Chapter 13 bankruptcy requires filing numerous documents and disclosing your assets, income, debts, and expenses. The bankruptcy court will appoint an impartial trustee to meet with creditors to secure your debt. You should also provide credit counseling.
In a Chapter 7 bankruptcy or liquidation, the trustee will sell your exempt assets. Exempt assets vary by state, but can include your home, vehicle, or other property. The trustee pays as much of your debt as possible to the creditor, and the court pays the rest.
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To file for Chapter 7, you must not have filed for Chapter 7 bankruptcy again within the last 8 years. Also, your current monthly income must be below the national median income or pass a means test.
Some debts, such as taxes, alimony, child support, etc., cannot be discharged. Once your case is over, you can apply for student loan forgiveness.
Many people turn to Chapter 13 bankruptcy or reorganization when they fail the Chapter 7 means test. They can also apply if they don’t want to lose their home to foreclosure.
Chapter 13 requires the borrower to set up a repayment plan that spends up to 100 percent of the borrower’s income over three to five years. Repayment is monitored by the trustee, who collects monthly payments from the debtor and distributes them to the lender as outlined in the repayment plan.
How To File Bankruptcy For Student Loans
A bankruptcy can stay on your credit history for up to 10 years. Your credit score can drop significantly during bankruptcy.
For student loans, you must take the additional step of filing a counterclaim in bankruptcy. The process will determine whether or not your debt will be paid.
A “complaint” is included in the adversary’s procedural documents. The complaint includes administrative details, such as your bankruptcy case number and the reason you are seeking a student loan discharge in bankruptcy, such as your extreme circumstances.
Student loans are subject to stricter requirements for discharge under Section 523(a)(8) of the US Bankruptcy Code.
Debt Consolidation Vs. Bankruptcy Pro’s And Con’s
If you file for Chapter 7, you can sue your opponent right after you file for bankruptcy. If you’ve already filed for Chapter 7 bankruptcy and your case is closed, depending on the state you live in, you may be able to file an opposing case to discharge your student loans.
If your Chapter 7 case has already been closed, you must first move to reopen the bankruptcy case. It is procedural in nature and does not restart the bankruptcy or eliminate your debt.
When it comes to Chapter 13 bankruptcy, whether you can file a lawsuit depends on the bankruptcy court rules in your state.
Regardless of when you apply, your student loan nightmare won’t end if you beat your competition. Before you complete the required Chapter 13 plan payments, you must wait until you receive a discharge order for your other debts before you can discharge your student loans.
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If you allow your opponent to file early, you can end the case quickly and get a decision on your student loan. The table below compares Chapter 7 and Chapter 13 bankruptcy.
Have enough income to pay off your debt within three to five years; aggregate secured and unsecured debt not to exceed $2,750,000
Cessation of collection activities; All debts, such as taxes, child support, etc., will be eliminated, except for debts that the court deems impossible to pay and loans that will never be discharged.
Cessation of collection activities; can stop foreclosures and give you more time to pay off your mortgage; unsecured debt balance paid after completion of priority and secured debt repayment plan
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To get your student loans forgiven, you have to show that not having them forgiven would put you in a difficult situation, and you have to meet certain conditions.
Student loan lenders can include payday lenders, servicers, and collection agencies, depending on the type of loan you have and how delinquent your payments are, and must meet certain conditions.
Most states use the Brunner test to determine what constitutes a deficiency. Basically, the test assesses the person’s current financial status, future prospects, and whether they have made good faith efforts to repay the loan.
A few states use the circumstantial test. It doesn’t take into account whether you’ve made good faith efforts to pay off your loan, such as getting a job, increasing your income, reducing your expenses, etc.
What Happens When You File For Bankruptcy?
The common denominator in these examples is that your situation has not improved enough to allow you to pay off your debt. Additionally, your expenses that the bankruptcy court will review must include affordable necessities such as luxury and non-essential purchases, such as restaurant meals, designer clothes, vacations, and even giving money to your adult independent children.
A student loan holder may choose not to file a bankruptcy discharge petition if they believe your situation is causing an undue hardship or to avoid court costs.
For federal loans, the Department of Education allows loan holders to accept court costs if they exceed one-third of the total loan debt, including principal, interest and collection costs. Private student lenders are likely to use similar logic.
If you plan to file for federal student loan repayment due to a physical or mental disability, you may not need to file for bankruptcy. You may qualify for automatic discharge based on total or permanent disability.
How Long Does A Chapter 7 Bankruptcy Take?
Other situations in which you can avoid bankruptcy court and file for administrative liability include death, closed schools, false certificates, unpaid refunds, and creditor repayment protection.
On June 30, 2023, the US Supreme Court struck down a broader plan to cancel federal student loan debt held by millions of borrowers.
In response to the Supreme Court’s decision, Biden announced major changes to federal student loan administration, opening the door to relief for many.
It is possible, but there is no guarantee. If your loan is federal rather than private, consider applying for help with the SAVE plan. The app takes about 10 minutes and can reduce your monthly bill to $0 per month.
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If you’re overwhelmed by student loans or other debt, consult with a financial advisor to review your other options.
If your student loan is from a private lender, such as a bank, contact the lender for help.
Student loans can be discharged as part of the bankruptcy process, but the process is complex and the damage to your credit score can be long-lasting.
The SAVE program offers a path to eliminating some student loan balances after making timely payments. These payment terms vary.
Bankruptcy & Discharging Student Loans
Going through the bankruptcy process does not guarantee a certain outcome. The bankruptcy court may agree that paying off your student loans will be an unreasonable hardship and will result in a full discharge of the loan. Or you may still have to pay the debt, collection costs, accrued interest, court fees, and attorney fees.
Before filing, weigh the pros and cons of bankruptcy, all of its possible consequences, and the impact on your credit score. Meanwhile, explore other options for renegotiating your student loan terms with your federal government or private lender.
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