How does bankruptcy work for students loans
Bankruptcy is a very well-known term that indicates a person/business is not able to repay the existing debt to creditors. As the legal proceedings begin all the assets of a debtor are evaluated and may be used to repay a portion of the debt.
In the United States bankruptcy filing comes under certain chapters of the bankruptcy code.
Chapter 7: Chapter 7 of the bankruptcy code initiates the liquidation of non-exempt resources and other assets in order to repay some parts or complete unsecured debts. There are certain conditions to be satisfied such as another chapter 7 bankruptcy shouldn’t be filed in the past 8 years, current monthly income should be below the state median, etc. Once the case is finished student loan discharge can be filed.
Chapter 13: Chapter 13 is for businesses who do not qualify for chapter 7 as they have stable income or assets to repay between 3 to 5 years. It is basically the reorganization of the debt payment plan guided by a trustee who supervises the process. Student loans under this chapter are considered non-priority unsecured debts.
How does bankruptcy work for students loans ! Consequences of filing bankruptcy
Bankruptcy can help you get rid of many types of loans. Unsecured debts such as credit card bills, personal loans, medical bills, etc. can be discharged easily. However, there will still be certain obligations like alimony, child support, and tax debts. The student loan is also a part of it. Bankruptcy doesn’t on its own discharge student loans. A step ahead of proving undue hardship is necessary for a student loan to be discharged.
Bankruptcy proves to give relief from not only non-priority unsecured debts but also puts a full stop to creditor harassment and collection activities. However, exceptional cases exist where a creditor can collect support payments. In the case of secured debt, it can still be wiped out but the collateral will be lost as well.
Proving Undue hardship
The real obstacle is proving that payment of student loans can bring extreme undue hardship for the borrower. The claim is reviewed by the loan holder. The process of evaluation then decides if discharging of loans will take place. If the loan holder believes that repayment of the loan might really bring undue hardship then it will not oppose the claim.
In other cases, the claim can be opposed if the holder is not convinced after examining it. Courts commonly use two tests: the Brunner test, and the totality of circumstance test. But some courts use others. The decision is taken by the court which determines the destiny of the student loan.
If loan discharge is unapproved in both chapter 7 and chapter 13 there is still an upper hand if filed through chapter 13. One of the advantages is that the loan holder doesn’t decide on loan payments. This decision is taken by the court and allows settlement in 3-5 years. After repaying through bankruptcy court there cannot be any collection actions against the borrower.
Things to consider before filing bankruptcy
Bankruptcy should be the last option for tackling such situations. Before landing on a such tough decision of filing bankruptcy you need to make sure there are no other useful alternatives. There are multiple substitutes for bankruptcy for student loan borrowers.
Income-driven repayment (IDR): For a period of underemployment or no employment the payments are adjusted. This is for federal student loans. Loans can be discharged after making 20 years or more of payment under the IDR plan.
Debt consolidation: This is basically the grouping of loans at a smaller interest or monthly payment. It is a great way to deal with the student loan. Banks, credit unions, lenders, or mortgage companies can help you with this. Private loans might not be eligible for this program.
Fortunate discharge: The federal student loan can be discharged if the school is permanently disabled. Also, a federal student loan doesn’t hurt your credit score.
Conclusion
The myth that student loans cannot be discharged in bankruptcy is completely wrong. There are certain conditions under which it can be partially or completely discharged. Bankruptcy can be a tool to start a fresh debtless finance journey.
But a person should consider other alternatives before filing bankruptcy. It is not a sure method to get rid of student loans as judges bring different perspectives and experiences. Similar past cases and judgments can be referred to at times.
The fate of your case also depends upon loan creditors. Again, bankruptcy is for people with an atrocious financial burden. If you have a strong case then things might go well but if not then it can prove to be a waste of time and resources.