Overcoming the Burden of Student Loan Debt With Bankruptcy
A college education is the first step of many a person’s professional journeys. But in the months and years after graduating, that journey can take a turn for the worse. Student loans can quickly become an unbearable burden, as the repayments begin six to nine months after leaving school, regardless of whether you’ve found work or not.
There are two things about student loans that most people aren’t aware of. It makes these loans more difficult to deal with than most other debt.
- A successful bankruptcy filing won’t automatically eliminate or discharge a student loan.
- If you fall nine months behind in repaying a student loan, the entire amount can be made immediately due.
How Do Student Loans Work in Bankruptcy?
When you file for Chapter 7 bankruptcy successfully, most of your debts will be discharged. Student loans, however, remain outstanding. You will need to file a discharge petition, and then have an adversary hearing in court. Your creditors may attend the hearing to challenge the discharge, but most of the time they don’t. The court will examine your case to evaluate whether you meet the criteria for “undue hardship” and if the student loan can be discharged.
For a Chapter 13 bankruptcy, a student loan becomes part of the payment plan that is negotiated. You will pay part of your debts off over the next three to five years, supervised by the courts. These payments may be lower than what you were paying prior to the bankruptcy, and lenders cannot demand the full balance of the loan while a payment plan is in effect. Once the Chapter 13 payment plan is completed, the remaining balance of the student loan will remain. However, many of your other debts will be discharged, so you’ll be able to focus on the student loan payments.
Proving Undue Hardship
To determine “undue hardship” in a Chapter 7 bankruptcy, the court calls an adversary hearing. This is considered a separate lawsuit in a bankruptcy case. This is where the court decides if a bankruptcy can eliminate any student loan debt due to undue hardship for the person filing the bankruptcy. There are three main factors the court looks for:
- Poverty: If you’re forced to repay the loan, will you be unable to maintain a “minimum standard of living”? This may mean showing you will be living on the most basic essentials and without things like cable, Internet or even a cell phone.
- Persistence of inability to pay: While you can’t pay the loan now, might you be able to later? You must prove your current financial condition is unlikely to change for most of the repayment period.
- Good faith effort: Have you made an effort to try and pay some of the loan? You must show the court you made a reasonable attempt to repay, even if it was only a few payments.
The road to dealing with student loan debt through bankruptcy can be complicated and challenging, especially for those who have never faced this. Get in touch with Dowe Law on 510-233-7700 today and let them guide you along the road to a better financial future quickly, easily and without fuss.