Currently, student loan debt cannot be discharged in bankruptcy, but the Department of Education is re-evaluating the criteria used to determine if a borrower can or cannot repay his or her debt.
Currently, courts require that you prove it would cause an “undue hardship” for you to re-pay the student loan debt. The problem is that Congress has never defined what constitutes an “undue hardship,” thus leaving it in the hands of many courts to determine if debtors should or should not have to repay their student loans.
Defining Undue Hardship
According to a 2017 report from the Consumer Financial Protection Bureau, there are around 44 million borrowers with student debt that totals about $1.4 trillion. Currently, courts use the Brunner test to define undue hardship. It’s based on three factors that borrowers must prove:
- Would you be able to maintain a minimal standard of living if you had to repay the loan?
- Are the financial difficulties you face temporary, or are they expected to continue for several years?
- Have you made efforts to keep up with your student loan payments before filing for bankruptcy?
A borrower must prove paying back debt will prove an undue hardship and will continue to prove an undue hardship.
These criteria might be changing though, in addition to how courts weigh the above factors. Earlier this year, the Department of Education issued a request for public comment to collect data as well as feedback on whether there’s a need to modify how undue-hardship claims in bankruptcy are evaluated.
Time will tell what happens with the decision regarding student loan debt. In the meantime, if you are suffering from student loan debt, there are options for you including debt consolidation of your other debt, and also bankruptcy.
Student Loan Debt and Bankruptcy
To understand why student loan debt cannot be discharged, you first need to understand that there are dischargeable debts (you will be released from paying) and non-dischargeable debts (you cannot be released from paying).
A common example of dischargeable debt is a credit card loan. Common examples of non-dischargeable debts are taxes, alimony, spouse support, child support, and student loans.
Student loan debt is non-dischargeable due to the belief that there are societal benefits to promoting access to higher education. Educated workers that have attended college are believed to be able to command higher salaries and are thus, better able to take part and compete in the global economy.
While it is rare for student loan debt to be discharged, there is a way – a debtor must prove that paying back the debt imposes an undue hardship on the debtor and any dependents of the debtor. The process of proving this can be extremely difficult for most debtors because it requires filing a lawsuit against the loan creditor.
Often times these cases have been won due to the fact that the debtor was suffering from a severe and permanent disability that drastically restricted their ability to earn a certain level of income.
To prove undue hardship, the debtor must prove the following:
- Based upon current income and expenses, the debtor is unable to maintain a “minimal” standard of living for himself or herself (and his or her dependents) if required to repay the student loans; and
- Additional circumstances exist that indicate this lifestyle is likely to persist for a significant portion of the repayment period of the student loans; and
- The debtor has already made documented good faith efforts to repay the student loan debt.
As you can see, this can be a very difficult case to prove. As with any bankruptcy, it’s always advised that you work with a bankruptcy attorney.
Choosing Your Bankruptcy
While student loan debt cannot be discharged in bankruptcy, you might be able to settle your other debt in bankruptcy. Depending on your situation, if you’re considering filing for bankruptcy, you’ll need to determine which form of bankruptcy – either Chapter 7 or Chapter 13 – you should file. As always, it’s advised that you work with a phoenix chapter 7 bankruptcy lawyer or phoenix chapter 11 bankruptcy lawyer to help you determine if bankruptcy is the next step for you.
Overview of Chapter 7 and Chapter 13 Bankruptcy
Chapter 7 (also known a straight bankruptcy) is the most common form of bankruptcy and is available to consumers and businesses.
Under Chapter 7, assets are sold off so that the proceeds can go to paying debt. All proceeds from the sales of those assets are handed over to a trustee, who then pays down any and all creditors. After all creditors have been paid off they are no longer able to collect funds directly from you and your debts are cancelled, meaning you are no longer responsible for them.
You are not able to discharge the following debts under Chapter 7:
- Alimony and child support
- Drunk driving judgments, criminal fines, restitution
- Debts incurred as the result of fraud or intentional wrongdoing
- Back taxes under 3 years old
- Student loans
- Recent purchases made for substantial amounts
- Contracts involving titles or liens such as land or automobiles
Chapter 13 reorganizes debt so that you are able to pay back debts over the next three to five years. This pay-back plan is called a debt repayment schedule. Based on your income, and how much you owe, you’ll repay 10-100% of the debt you owe.
You are not able to discharge the following debts under Chapter 13:
- Alimony and child support
- Drunk driving judgments
- Criminal fines
- Student loans
Reasons to File Chapter 7
Chapter 7 bankruptcy should be chosen if the following apply:
- You have no hope and have no future hope of being able to repay any debts
- Your debts do not have co-signers on them
- You are going to be sued by creditors
- You don’t qualify for Chapter 13
Reasons to File Chapter 13
Chapter 13 bankruptcy should be chosen if the following apply:
- You have already filed Chapter 7 in the past six years
- Your debts have cosigners
- You will be able to pay your debts within three to five years
- Your income disqualifies you from filing for Chapter 7
- You need relief from collection proceedings and you want to pay your creditors back but just need some breathing room to get your finances under control
- You want to be able to file a Chapter 7 bankruptcy some time in the future
- You are behind on your mortgage
- You owe back taxes
- You have assets that could be liquidated in Chapter 7
- You’re a farmer with debt not related to your farming operations and do not qualify for Chapter 12
Consider the Cons and Pros of Bankruptcy
As always, you’ll want to consider the pros and cons of filing for bankruptcy. As always, it’s advised you work with a phoenix chapter 7 bankruptcy lawyer that can help advise you.
One immediate advantage that helps debtors when they file for bankruptcy is the “automatic stay.” This motion alerts creditors that they must stop their efforts to collect money from debtors. This stay is what stops creditors from calling you! Under an automatic stay, creditors are not allowed to call, send collection letters, file lawsuits, garnish wages, or seize assets – except for in specific situations such as the collection of alimony and child support payments.
The biggest “pro” of filing bankruptcy is that a court discharges your debts. That means that certain debts will not need to be repaid. This, of course, is dependent on the form of bankruptcy you file: either chapter 7 or chapter 13.
One “con” of bankruptcy is that while it will discharge most debt, it does not discharge certain debt, such as mortgages, student loans, taxes, alimony, or child support. While student loan debt has been forgiven in extreme cases, for the most part, it is never discharged in bankruptcy. Additionally, a debtor can lose certain nonexempt property in a bankruptcy filing because a court orders it to be sold.
Bankruptcy will also have an effect on your credit score. While your credit might already be low because of delinquent payments, once a bankruptcy is filed, it’s required by the national credit reporting agencies that it appears on your credit report. A chapter 7 bankruptcy will stay on your credit report for 10 years and a chapter 13 will stay for 7 years.
The impact on your credit can hurt your future ability to qualify for a future loan or credit card. It might also affect your ability to be hired or secure living arrangements. Some employers and future landlords evaluate a persons credit score to determine if they are good candidates.
Working with a Bankruptcy Attorney
Bankruptcy can be an overwhelming process. That’s why we advise that you work with a phoenix business bankruptcy lawyer that is familiar with various debt repayment options. We are committed to helping our clients understand their rights and options under the bankruptcy law and developing the debt relief solution that makes the most sense for each individual. We invite you to call (602) 648-3274 or contact our Arizona office to schedule a free initial consultation.
668 N. 44th St., Ste 320, Phoenix, AZ 85008