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If you are struggling with student loan payments or other debts and are considering bankruptcy, you may have read that student loans are usually not forgiven once you apply.

That’s true in some cases, but there’s hope. Even bankruptcy student loans can be discharged. This is a longer process with more requirements, known as adversarial proceedings.

Bankruptcy is an option, but remember that it has serious consequences. Bankruptcy should therefore only be considered as a last resort.

Here’s what you need to know about filing for student loan bankruptcy.

How does student loan bankruptcy work?

To get your student loan forgiven in bankruptcy, you’ll need to prove that paying off your debt will cause you and your dependents “undue hardship.”

If you can argue that paying off your student loans causes undue hardship and a bankruptcy judge agrees with you, the court can rule to forgive your student loan debt. However, this result is rare.

However 0.1% of student loan debtors A study published in the Duke Law Journal found that people who file for bankruptcy get their education debts forgiven.

So before considering bankruptcy and getting rid of your student loans, consider other options for stopping or reducing your monthly payments. Linking, postponement, toleranceand an income-driven repayment plan.

I have decided to file bankruptcy because I am struggling financially with other debts such as credit cards, personal loans and car loans. If your only debt is student loans, you are not eligible for bankruptcy discharge.

There are two options for filing for personal bankruptcy: Chapter 7 or Chapter 13. Whichever type of application you choose, you will need to take additional steps to process the other party.

Please note the following: Whatever you do, don’t ignore the problem. If you are unable to pay your federal student loans and default, the IRS may withhold tax refunds from you and apply them to your loans.

Continue reading: Income Focused Repayment: Which Plan Should You Choose?

What type of bankruptcy filing should I use?

The U.S. Bankruptcy Code contains six different types of bankruptcy, each named after the corresponding chapter of the bankruptcy code. There are two chapters available for individuals: Chapter 7 and Chapter 13.

Chapter 7

A Chapter 7 bankruptcy is also called a liquidation. In this type of filing, a court-appointed trustee sells non-exempt assets (such as jewelry or valuable collections) and distributes the proceeds to creditors.

In no particular order, you can expect:

  • Exemptions may vary by state. You are generally allowed to store your home, your car to work, your clothes, and your household items.
  • Disclaimer: Once the case is complete, the court will release all eligible debts, including credit card debt, personal loans, promissory notes, medical expenses, judgments in litigation, and obligations under leases and contracts.
  • Debts that cannot be discharged: Chapter 7 bankruptcy covers certain debts, including child support, alimony, fines and penalties for breaking the law, certain tax liabilities, and debts arising from killing or injuring someone while driving under the influence of drugs or alcohol. types of debt are never discharged.
  • Eligibility: To qualify for Chapter 7 bankruptcy, you must pass the means test. Form 122A-2A means test is designed to determine if you can financially pay off some of your debt. If the analysis determines that you can afford to pay some of your debts, you are not eligible for Chapter 7 and may consider filing for Chapter 13 bankruptcy.

Chapter 13

Chapter 13 bankruptcy is also known as a “wage worker’s plan.” In this type of filing, you work with an attorney to develop a plan to pay the creditor in installments over her 3- to 5-year term. During this time, the creditor cannot collect the debt.

Once the repayment period is over, the court can release the remaining eligible debts and keep the assets.

To qualify for Chapter 13 bankruptcy, you must meet the following requirements:

  • Have enough regular monthly income to meet the proposed repayment plan.
  • Within 180 days of filing for bankruptcy, you must receive credit counseling from an accredited credit counseling agency.you can find a list of Approved credit advisory agency From the U.S. Department of Justice.
  • When filing your income tax return, you need to have up-to-date information.
  • Combined secured and unsecured debt less than $2.75 million as of the filing date.

Filing a lawsuit against the other party

Adversary proceedings are the additional steps required to ask the court for forgiveness of student loans as part of a bankruptcy lawsuit. It is essentially a lawsuit filed separately from, but in connection with, your bankruptcy case.

After you file for bankruptcy, identify your student loan creditors and draft a complaint asking a judge to clear the debt because paying them back would create undue hardship.

You may also need to include details and additional documents proving your financial situation and the reasons why you are unable to repay your student loans. increase.

The office will send instructions to notify each student loan creditor. The creditor’s attorney will respond to the lawsuit — they may argue that your student loan debt is not covered by the discharge.

Ultimately, your case will end in one of three ways:

  1. settlement: You and your creditor agree to settle your student loan debt for less than the full amount you owe.
  2. Dismissal: You, your creditor, or a judge may request dismissal of the action.
  3. Decision by Judge: If your case is dismissed or not resolved, the judge will decide whether to fully or partially forgive your loan.

learn more: 11 strategies to pay off student loans faster

When to file a lawsuit against the other party

You should file an adversary action immediately after filing for Chapter 7 or Chapter 13 bankruptcy.

Between 21 and 40 days after filing a bankruptcy petition, the trustee will hold a creditors’ meeting. At this meeting, questions from the trustee and creditors must be answered under oath.

Useful information: If your student loan creditors wish to contest your adversary lawsuit, they must generally notify the court within 60 days of the date of this meeting.

Comparing bankruptcy options

Filing for bankruptcy can hurt your credit score, dropping it by hundreds of points. Chapter 13 bankruptcies are generally viewed more favorably by credit bureaus than Chapter 7 bankruptcies. However, this is still a big decision and should only be considered as a last resort.

Here is a table summarizing the differences between both options.

Chapter 7 Chapter 13
who can file Anyone who passes a means test Those with a regular monthly income sufficient to meet the proposed repayment plan
common time frame 4-6 months 3 to 5 years
Application fee $338 (plus attorney fees) $313 (plus attorney fees)
credit score effect Lower your credit score and stay on your credit report for 10 years Lower your credit score and stay on your credit report for 7 years
with relief Forgive all eligible debts Forgives remaining eligible debts after successful completion of repayment plan

Excessive Hardship and Student Loans

To get your student loan bankrupt, you’ll need to prove to a judge that repaying the loan will cause you undue hardship. Unfortunately, there is no one-size-fits-all answer to what undue hardship means, so each court has had to develop its own definition.

Many courts rely on the Brunner test to assess whether student loan payments cause undue hardship. The Brunner test must prove that:

  • With your current income and expenses, you won’t be able to maintain a minimum standard of living if you have to pay off your student loans.
  • Your financial situation can last for a good portion of the loan repayment period.
  • You have made a good faith effort to pay off the loan, trying to increase your income and decrease your expenses.

Other courts have found the Brunner test too restrictive and have used the Totality of Circumstances test instead. In this test, when determining whether you can afford to pay back your student loans, courts will consider:

  • Past, present and future financial resources
  • reasonable cost of living
  • Other relevant factors

Ultimately, your eligibility for student loan forgiveness in bankruptcy depends on your financial situation, the tests the courts use, and which judge decides your case.

Other considerations

Proving undue hardship under hostile proceedings can be difficult. But it is not necessary.of a particular kind Debt related to educational expenses According to the Consumer Financial Protection Bureau, you can avoid bankruptcy without filing counterparty proceedings or meeting undue hardship criteria.

These obligations include:

  • Loan amount paid directly to the student, not the university, that exceeds the cost of attendance (including tuition, books, room, and food)
  • Loans to pay for education at locations not eligible for Title IV funding (this may include non-accredited colleges, foreign schools, or non-accredited certificate programs)
  • Loans made to cover your tuition and living expenses while you study for the bar exam or other professional exams
  • Loans made to cover the costs of completing a medical or dental residency, living expenses, and moving expenses
  • Loans to cover educational expenses while attending school for less than half a year

Tips: If any of your loans fall into one of the above categories, talk to your bankruptcy attorney about forgiving the loan as part of a regular bankruptcy filing.

Bankruptcy is an effective way to get out of crippling debt if you’re in dire financial trouble. Pursuing it can be a waste of time and money. It would be better to spend on

Even if you don’t qualify for discharge, there are other options to lower interest rates or reduce your monthly payments on private student loans, such as student loan refinancing.

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check out: Student Loan Repayment Calculator: Estimate Your Repayment Date

About the author

Janet Berry Johnson

Janet Berry-Johnson is an authority on income tax and small business accounting. She has been a CPA for over 12 years and a Personal Finance Writer for over 5 years. Janet has contributed to several well-known media outlets, including The New York Times, Forbes, Business She Insider, and Credit Her Karma. In 2021, Canopy named her one of her top 10 most influential women in accounting and tax.

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