Filing for bankruptcy is never ideal, but there are situations where debt cancellation is the only way to go. This is true for medical debts, credit card bills, and even student loans, although the type of bankruptcy you should pursue (Chapter 7 or Chapter 13) depends on many factors, such as your ability to work at something. title whatever.
Many people believe that you can’t pay off student loans in bankruptcy, but that’s not always the case. There are processes you can follow to try to have your student loans canceled, but you will need to prove that you are facing something called “undue hardship” to qualify.
How to file bankruptcy with student loans
The first step to bankruptcy with student loans is to find a lawyer who has expertise in this area. Working with a knowledgeable legal advisor can help you navigate the process, although you should be aware that bankruptcy can cost thousands of dollars and being able to afford a lawyer may mean you are not. eligible for release due to undue hardship.
However, some student lawyers may offer a free consultation, where they can go over your options and let you know if bankruptcy is a viable option for you.
You then have the option of declaring bankruptcy under Chapter 7 or Chapter 13, but you must be able to “show that the repayment would put you and your dependents in undue hardship.” according to the US Department of Education.
The proof of undue hardship will take place in “adversarial proceedings in bankruptcy court,” he notes. In addition, your creditors or representatives of your creditors may be present at the proceedings to contest your claim.
What Kind of Bankruptcy Should You Consider? It depends on your ability to work and earn an income, as well as what you hope to achieve. There are two main types of bankruptcy for consumers:
- Chapter 13 Bankruptcy allows you to keep your property, but you have to pay off most of your debt over three to five years. This is why Chapter 13 bankruptcy is often referred to as a “reorganization”.
- Chapter 7 Bankruptcy paves the way for a liquidation of your assets, which will be sold to pay back some of the money you owe. With Chapter 7 bankruptcy, your debts will be completely wiped out.
After you file for Chapter 7 or Chapter 13 bankruptcy, you or a bankruptcy lawyer will need to file a complaint to start the sequence of events that leads to adversarial proceedings. At this point, you may receive a discharge for all of your student loans, a discharge for some of your loans, or no discharge at all.
What is undue hardship?
While undue hardship may seem different to each person, this term is used to describe a situation where it would be next to impossible for you to pay off your student loans.
For example, undue hardship would describe any situation where someone cannot pay their student loans and afford a roof over their head or put food for the table. If you have accumulated a large student loan debt but have become unable and unable to work after a car accident, for example, this is a situation that may qualify.
The undue hardship must also be likely to “continue for a significant portion of the loan repayment period,” notes the US Department of Education. In other words, a debt-ridden medical student cannot file bankruptcy on their loans, have them released, and then earn significant income a few years later.
You should also make a good faith effort to pay off your loan before going ahead with bankruptcy. If you don’t, you’re less likely to be successful in bankruptcy court.
Can student loans be canceled under Chapter 7?
You may be able to get your student loans canceled under Chapter 7 bankruptcy, but the terms under which this might happen can only be decided by the bankruptcy court. Chapter 7 bankruptcy is more likely to work in cases of undue hardship where it would be impossible for the applicant to repay their loans under a repayment plan.
What happens if the bankruptcy court does not discharge my loans?
Once you move forward with Chapter 7 or Chapter 13 bankruptcy, three possible scenarios may arise. You might see all of your student loans and other debts wiped out completely, your loan might be partially paid off, or you might have to pay off your loan on better terms, such as a lower interest rate or monthly payment. You may also be unable to change the terms of your loans at all during bankruptcy proceedings, which is a risk you will need to take.
If the courts find that your undue hardship claim is not sufficient to qualify for bankruptcy, you may have no choice but to continue your efforts to repay your loans. Some of the options you may want to consider at this point include:
- Change your payment plan on federal loans: Note that you may be able to change your repayment plan and pay off your student loans over a period of up to 30 years, which could significantly reduce your monthly payment.
- Apply for income-based repayment plans: These plans allow you to pay a percentage of your discretionary income for 20 to 25 years before finally giving up your loan balances. You also pay a percentage of your discretionary income each month, so your payments could be much lower than they are now.
- Look for other loan forgiveness programs. The Public Service Loan Discount (PSLF) is available to people who are ready to take eligible positions in the public service and make payments on an income-oriented plan for 10 years, but there is other types of loan forgiveness plans you can explore.
- Ask for a temporary adjournment or an abstention. If you need temporary relief from your federal student loans, look into adjournment and abstention, both of which allow you to put your loan payments on hold for a limited period. Keep in mind that interest may continue to accrue during abstention, which could make your problem worse.
- Refinance your student loans with a private lender. This option will not work for everyone, but you can refinance your student loans with a private lender which might offer a lower interest rate or a monthly payment than you can afford. Remember, you lose federal benefits like deferral, forbearance, and access to income-driven repayment plans when you refinance federal loans with a private company.
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