Today, student loans are one of the most crippling debts that college graduates have accrued. Often, it’s not the amount of the original loan that causes difficulty with repayment but the punishing interest rate on the loan combined with stagnant wages. Recent reports show that it’s not just students who face student loan difficulties. Parents often take on this financial burden for their college-bound students and are now struggling to pay back the loans.
However, despite the stress that borrowers face as they attempt to pay back their student loans, they may be able to file for Chapter 13 bankruptcy and get their student loans discharged. While it is possible to discharge student loans, it can be a difficult process and it is highly unlikely all of your student loans will be discharged if any. However, filing for bankruptcy can often be a solution to help borrowers get back on their feet.
Student Loans and Chapter 13
Filing for Chapter 13 bankruptcy has a number of benefits. First, an automatic stay will be placed on all of your accounts, meaning that your creditors, including student loan creditors, cannot attempt to collect the debt or engage in collection actions while the stay is in place.
If you file for Chapter 13 Bankruptcy, all of your debts, including public and private student loans, are assessed and you will enter into a repayment period that will last either 3 or 5 years. Your student loans are considered non-priority debts, which means that other debts you may owe, such as taxes or child support payments, will take precedence in the repayment process. This means that while your priority debts may be paid in full over the repayment period, you may not make full payments on your student loans.
In your Chapter 13 plan, your income will be examined and a determination will be made as to your monthly budget and how much can be allocated towards your debt. For example, if you can afford monthly payments of $100, your priority debts will be paid first and only then will the remainder of the funds go towards repaying nonpriority debts, such as your student loans or credit cards. Depending on the payment amount and size of your student loan, you may end up paying only pennies for every dollar you owe.
However, once your Chapter 13 repayment plan has ended, you will be responsible for the remainder of the student loan debt you owe to the lenders, plus interest that accrued during the repayment period. This means that your student loan debt could increase while you are in a Chapter 13 repayment period.
Discharge your Student Loan Payments
Bankruptcy courts provide a method by which student loans can be discharged. This is more common in Chapter 7 Bankruptcy proceedings, where your assets are liquidated to pay your creditors. In this case, you will still be liable for some debts, such as back taxes and child support payments.
For student loans, you will need to file a form called a Complaint to Determine Dischargeability to show that these loans have created an undue hardship in your life.
Most courts follow the Brunner Test to determine if your student loans have caused undue hardship by looking at these three factors:
Based upon current income and expenses, you cannot maintain a minimal standard of living for yourself and your dependents if you must repay these loans.
Your current financial situation is likely to continue for a substantial part of the repayment period.
You have made a good faith effort to repay your student loans.
The Bankruptcy Judge will review this filing, and the creditor will have the opportunity to contest your request.
Kelly Can Help recently had a bankruptcy case where we successfully discharged a student loan. Parents of a college-bound senior had cosigned a loan for their daughter over 20 years ago. In the ensuing years, the loan grew from $20,000 to over $70,000. The parents were over 50 and nearing retirement and this massive debt was an undue hardship. The private lender was not prepared to defend this charge and our firm won a default judgment for our clients.
In our experience, a discharge is a rare occasion but bankruptcy courts are beginning to recognize the undue hardship many borrowers, especially borrowers over 50, are facing as a result of their student loan debt.
Even though student loans in bankruptcy may not entirely vanish, there are still debt relief options available that can provide you with financial relief while you get back on your feet.
This article does not provide legal advice and is for informational purposes only. If you are struggling to repay your student loans and have been wondering if filing for bankruptcy is right for you, contact the Law Office of Jeffrey B. Kelly to discuss your options.