Filing for Bankruptcy with Student Loans


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When a former student is unable to pay for the debts he or she has accrued, it is then time to think about bankruptcy. However, with student loans mixed into these proceedings, the individual that has accrued debts must ensure he or she is covered either by having them removed with the bankruptcy or through possible payments with the loans.

While it is difficult to discharge a student loan during the bankruptcy process, it is not impossible. Through proving that paying on the debt will impose some sort of undue hardship on the owner of the loan or dependents, it is possible to remove them when going through bankruptcy. The courts may use other tests to evaluate if the borrower has shown or will show any undue hardship. One of the most common is the Brunner test which will prove that the debtor cannot continue, maintain or progress through current income, expenses and taxes what is deemed a minimal standard of living for himself or herself or dependents if the payment for the loans goes through.

The Brunner test will also show that any additional circumstances which may exist to prove the debtors state of affairs will persist and not improve for the primary portion of the repayment period, he or she may be going through undue hardship. The last portion of this test is that the borrower has already made good faith efforts to repay the loans. While most courts use this method, not all do, and it may be easier or more difficult to demonstrate that the loans should be discharged when bankruptcy is initiated. All but the First and Eight Circuits of federal courts have adopted this method.

Undue Hardship for Student Loans

When successfully proven that undue hardship will occur due to student loan debts when going through or after bankruptcy has been declared, the former student may have his or her loan or loans cancelled completely. This filing protects the individual from collection actions for all debts accrued. However, once the bankruptcy case has been resolved, the creditors may obtain permission to start collecting the monies owed again from the courts if the amounts have not been settled. This is possible for student loan debt as well if the undue hardship has not been sufficiently proven. However, if the person may show undue hardship, bankruptcy may be the best option open to relieving these financial obligations.

The best results are often obtained when consulting a lawyer before following through with most actions that could affect the life of an individual. The legal representative may explain both the advantages and disadvantages of this action or another. Bankruptcy usually remains on the credit history of the person for up to ten years after it has been filed. There are procedures that must be satisfied and fees that must be paid with this process, and there are limits of what bankruptcy may provide based on the type and what is available at the time the person files. The laws change how this method works to assist in financial payments.

Discharging Student Loans through Bankruptcy

Before a student loan may be discharged through bankruptcy procedures, the former student must file a petition so that he or she may obtain a determination. If this was not filed or requested when bankruptcy procedure were started, the individual has the chance to reopen the case to proceed. This should be possible without additional fees for filing. The Chapter 11 Student Loan Law has information about discharging student loans through these processes. While it is up to the court to decide that undue hardship will occur, there are examples online and through various publications to assist in understanding how to demonstrate undue hardship.

If someone has reached his or her maximum earning capacity, has not earned enough to pay loans or is only earning a minimal amount to support family, he or she may be granted a discharge. This is often observed through older persons that were students and are only earning near minimum wage. Some members of families are trapped in the poverty cycle and cannot break free. This is also observed in persons engaged in a marriage or relationship with worthwhile jobs that pay lower amounts. Teachers and others in the education field are frequently paid far lower than the degree cost to obtain.

Legal Help in Student Loan Discharges

It is important to contact a lawyer before filing bankruptcy to determine if the student loans may be discharged.

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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.

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