Overwhelmed by Student Loans? What’s Your Best Bankruptcy Option?
So you borrowed a lot of money to provide yourself with a college education, then you went out into the real world and found that getting a job can be tough. Maybe you experienced health problems, or went through a divorce. You may have considered bankruptcy as a way to get a fresh start, but you are uncertain whether you can use a bankruptcy petition to either discharge or restructure your student loans.
The General Rule
As a general rule, almost all student loan debts are not dischargeable in a bankruptcy proceeding. You can, however, seek to pay and satisfy student loan debt through a Chapter 13 filing. ,Your student loan debt will be treated as non-priority unsecured debt, similar to medical bills or credit card obligations. As such, when you put together your reorganization plan, during the 3 to 5 years of your Chapter 13 Plan your student loan creditors must accept the same pro-rata share of the amount you are able to pay all creditors. Unfortunately, if your plan does not provide for full payment of all unsecured debt, when the Chapter 13 bankruptcy period is over, you will still owe any remaining balance on your student loans. During the period of the bankruptcy, though, you may be able to delay or reduce student loan payments, and you won’t have to worry about any collection attempts.
The Hardship Exception
If you can show that you would incur an undue hardship if you have to pay your student loans, you may be able to have some or all of them discharged in a Chapter 7 proceeding. Most courts follow the Brunner test, a decision from New York, which allows discharge of student loan payments in bankruptcy only if you can show that you cannot maintain a minimal standard of living for you and your dependents if forced to pay your student loans, that your current financial condition is likely to continue for most of the repayment period, and that you have made a good faith effort to repay your student loans. In practical terms, this standard is hard to meet. The realityis that most federal bankruptcy courts take a conservative approach and discharge of student loan debt is extremely rare.
People who have student loans from schools that closed before the student completed studies, or made false certifications about the benefit of the program may have other means of getting a discharge of the student loan debt. Usually, these are trade and vocational schools.
Discharge and income based repayment plans available for most federal program student loans.
A better option for many people is to explore the programs available for most federal program student loans. The options here can include income based repayment plans or loan foregiveness after a period of years. People working for qualifying non-profit organizations or for certain government or public service fields may be eligible for a public service loan foregiveness. Death or disability are also possible grounds for loan foregiveness.
Whatever your situation, it is critical to collect together all the information about the type of loan program, the loan terms, and the account history. Hopefully you kept all this information. If not, try reaching out to the original school’s financial aid office.
Contact Neuner & Ventura, LLP
We understand the stress, anxiety and confusion that can be associated with a potential bankruptcy filing. We offer a free initial consultation to every client. For an appointment, call Neuner & Ventura at 856-596-2828 or send us an e-mail. We do, however, reserve the right to charge a fee to review any work done by another attorney. Evening and weekend appointments are available upon request.
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