Student Loans and Bankruptcy

Get Rid of Student Loan Interest in Chapter 13 Bankruptcy

Bankruptcy and student loan debt attorneyIt’s true.  You can discharge student loan interest in a Chapter 13.  You do not even have to prove student loan hardship.  It goes like this.  In United Student Aid Funds, Inc. v. Espinosa, No. 08-1134 (U.S. March 23, 2010), debtor filed a Chapter 13 bankruptcy.  The debtor filed a plan that said he would pay the student loan, but wanted to discharge the interest.  The bankruptcy court confirmed the plan.  No objection was filed by the student loan lender.  At the completion of the plan, the payments ended, and the student loan interest was discharged.  Debtor did not have to pay the student loan interest.

After the closing of the bankruptcy case, the lender attempted to collect the student loan.  The lender still tried to collect the interest, even though it had been discharged in bankruptcy.  The debtor argued that the debtor would have to sue the lender, and proved hardship, before the debt was discharged.

The Supreme Court disagreed with the student loan lender, and ruled in favor of the debtor.  The Court said that the student loan interest was in fact discharged and did not have to be paid.  The Supreme Court reasoned that the lender had actual notice of the bankruptcy (and the plan that provided for the discharge of the interest).  The student loan lender could have appeared in bankruptcy to protect its rights.  However, the Supreme Court made clear that discharging student loans (rather than interest) through plan confirmation violates the bankruptcy code and it’s uncertain how courts will treat this situation in the future.  However, the Supreme Court did say that the student loan interest was dischargeable in a Chapter 13.

Get Rid of Student Loans in Chapter 7 Bankruptcy

Arizona student loan debt attorneyThere is a common misunderstanding that student loans cannot be discharged in bankruptcy.  That is simply not true.  Student loans can be discharged in bankruptcy.  Here’s how.

Your government protects student loans whether they are made by the government or another lender.  The interest rates are really low, because thestudent loans are secured by the government.  Student loans are hard to get rid of.

However there are a lot of benefits to student loans.  The lender or the government cannot collect student loans as long as you are in school.  Student loans must contain ways to delay payments, and they are supposed to be easy to work with.  However, just like with any government agency, we all know how that works out.

So, just going into bankruptcy, student loans are not affected, unless you ask.  There are laws that require student loans to be discharged in bankruptcy.  All you have to do is prove the student loans are causing hardship.  However, in order to do this, you have to sue the student loan lender in bankruptcy court.  You will probably need a experienced bankruptcy lawyer for this.

There are three factors the bankruptcy court will look at to determine hardship.  You have to show all three of them:

  1. Poverty.  Based on your current income and expenses, you cannot maintain a minimal living standard if you have to repay the loan.  
  2. Persistence of hardship.  You cannot pay the loan now, and you are not likely to be able to in the future.  This is normally the case if you have encountered a disability, or if you are elderly and cannot earn money anymore.  

  3. Good faith.  You’ve made a good-faith effort to repay your student loan.  You have to actually try to repay your student loan for some period of time.  

Making student loans hard to discharge might seem mean.  But, the bankruptcy court leaves it to congress to say what is able to be discharged.  Congress said not to discharge student loans, and the bankruptcy court is not looking for a fight.  However, there is a way to do it, and the bankruptcy court will use it.  Moreover, student loan regulations require a lot of flexibility on the creditor’s part, including moratoriums on payments, temporary reductions in payments, and extensions.  There are a lot of other ways to deal with student loan debt.  However, bankruptcy might let you not pay it a

STUDENT LOANS FAQS

ANSWER:

Student loans typically can’t be discharged in a bankruptcy. However, if you meet certain requirements, you may be able to discharge your student loans in a Chapter 7 or Chapter 13 bankruptcy. You may have a better chance of discharging your student debt if you attended a trade or vocational school. You can avoid repaying your loans if you can prove fraud, deceptive business practices, etc.

ANSWER:

Your first steps will be to determine which chapter you want to file, hire an attorney, and file your bankruptcy petition. You will also need to file a Complaint to Determine Dischargeability. You (or your attorney) will need to prove in court that paying your loans will create an undue hardship. You may even need to have expert witnesses testify to your future employability.

ANSWER:

The Brunner Test is used to prove that you are in a financial hardship that makes it impossible for you to pay off your loans. The Brunner test has three requirements: extenuating circumstances creating a financial hardship; the extenuating circumstances will continue for the rest of the lifespan of the loan; and the borrower has made good faith efforts to pay the loan. Factors that will be considered for the Brunner test include disabilities, lack of other options, how many working years the debtor has remaining, and obligations to dependents.

ANSWER:

                You will still owe your loans after your case is discharged. You will need to deal with your student loans separately.

ANSWER:

                You can include your student loans in your payment plan, so the total amount you are paying will likely be less for the 3-5 year period of your bankruptcy. Student loans are treated as priority debts in a Chapter 13,  meaning the entire balance doesn’t need to be paid off during your bankruptcy.

ANSWER:

No. You will have to prove undue hardship whether your loan is from the government or a private lender.

ANSWER:

There are options besides bankruptcy to deal with your student loan debt. You can request an income-based repayment plan, that will use all your forms of income weighed against your family size and other factors. These plans typically last 20-25 years, and the remaining balance of your debt will be forgiven at the end.

You also may be able to refinance your student loans. You should contact your lender to see what options are available to you.

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