Student loan debt is a significant factor in the financial dilemmas many people face. If debt has significantly affected your life or you’re having trouble making payments, you may be considering bankruptcy as an option for debt relief. In this blog post, we go over the basics of what you need to know about student loans and bankruptcy.
Most people assume that student loans cannot be discharged through bankruptcy. In fact, there are some instances where student loans can be discharged, but specific requirements must be met when dealing with student loans and bankruptcy.
What to Consider Before Filing for Bankruptcy
As a student loan borrower, you should consider the following points before filing for bankruptcy.
Don’t file for bankruptcy if a student loan is your only debt: If you’re not saddled with any other debts, then it’s likely your student loans will not be discharged. Furthermore, the Department of Education looks at this as an intentional way for you to avoid repaying.
There are costs to filing for bankruptcy: You are required to pay court fees upfront. Additionally, suppose you can afford an attorney. In that case, the court may not look at you favorably and might find that your financial situation is not bad enough to discharge your student loans.
You might wind up owing more on your student loans: The court determines how much you will pay each creditor. If the court lessens your payments’ size, you could build up additional interest on your student loans.
How Student Loans and Bankruptcy Works
Filing for bankruptcy isn’t a one-and-done solution to getting your student loans wiped. To have your student loans discharged, you must file for one of the bankruptcies, either chapter 7 or chapter 13, followed by an adversary hearing. When you file for one of the bankruptcies, you will have to disclose your income, debts, assets, and expenses. You must also participate in credit counseling before the proceedings can start.
Filing for bankruptcy is a way for you to catch up if you have fallen behind financially, and it stops your debt from growing. Once a bankruptcy claim has been filed, all of your creditors are required to stop collection activities and wage garnishment until the completion of your case or until the court has permitted them to restart collections.
Know the Different Types of Bankruptcy Filings
The bankruptcy process can be burdensome and complicated, and it’s wise to work with an attorney who knows the ins and outs of bankruptcy law and understands the process.
Once you hire an attorney, they will decide which type of bankruptcy case works best for your situation. Under chapter 7 bankruptcy, your assets will be sold, including your car, home, and other possessions of value. An appointed trustee will then try to pay off as many creditors as possible, and the remainder of your student loan debts will be discharged through court.
Under chapter 13 bankruptcy, a repayment plan will be established, which will use up to 100% of your disposable income to pay the creditors within a three-to-five-year repayment period. A trustee will supervise the repayment and collect monthly payments from you to disburse to creditors. Based on your circumstances, the bankruptcy court will decide the amount of your new monthly payments.
For more information on specific bankruptcy filings in Maryland visit the United States Bankruptcy Court District of Maryland’s webpage.
How to Prove Undue Hardship for Student Loans During Adversary Proceedings
During the adversary hearing, you must demonstrate that your student loans cause undue hardship. You must meet all of the requirements of the Brunner test for the court to approve your student loan discharge. The requirements of the undue hardship standard are as follows:
You’re in a financial situation that’s expected to linger for a substantial amount of time: You may be able to meet this requirement if you have a severe physical or mental disability or you received a low-quality education.
You have made a good-faith effort to repay your student loans: If you cut unnecessary expenses, increase your income, and try to negotiate a payment plan, you may meet this requirement.
Paying student loans would deprive you of a minimal standard of living: You must have minimal expenses and must have done everything necessary to boost your income to meet this requirement.
Schedule a Consultation with a Bankruptcy Attorney
If you’re in financial distress and considering filing for bankruptcy, our experienced Greenbelt bankruptcy attorneys can help. To schedule a consultation, call the Phillips Law Offices at 301-494-4250 to discuss your case. Our experienced lawyers can answer any questions you may have about student loans and bankruptcy.