Can Bankruptcy wipe out Student Loan Debt?
What many find after earning their degree is ever-growing debt from student loans with no way to repay them.
Going to college is a dream of many who see higher education as a way to pursue a better lifestyle and a higher paying job. What many find after earning their degree is ever-growing debt from student loans with no way to repay them. Bankruptcy is their only way out, or is it?
Bankruptcy Law Changes
Student loans are not dischargeable under bankruptcy. In 1998, the bankruptcy code changed. Student loans are no longer dischargeable no matter how old the loan may be. Further changes under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 added privately funded student loans to non-dischargeable status along with federal government and non-profit funded student loans.
The Only Exception - Undue Hardship
The only exception to student loan non-discharge is undue hardship. Undue hardship usually means you can not maintain a minimal standard of living for any length of time while paying back the student loan. Pursuing the undue hardship exemption requires a separate motion and a hearing before a judge, and the burden of proof lies on you. The courts determine the level of hardship based on a test from the Brunner case and very rarely grant in your favor.
Relief is Available
While discharge isn't possible in most cases, there may be relief through bankruptcy. In some cases you can challenge the enforceability of the loan or the loan balance.
If the school closed prior to you finishing your education, an enforceability challenge may be brought up in both Chapter 7 and Chapter 13 cases. A judge may decide to relieve the debt if no creditor exists to receive the dividend.
You can challenge the balance of the loan. Many student loans are transferred to many different lenders over time, resulting in lost payments, poor record keeping, and higher fees or interest. Under Chapter 13 bankruptcy, you can object to the claim of the loan holder. It will be up to the holder to prove ownership, and the judge will determine how much of the loan is properly owned.
Temporary relief is possible with loan consolidation. Some student loans can be combined with other loans as part of a Chapter 13 payment plan. However, the balance is not discharged at the end of the 3-5 year plan. You are still responsible to pay the remaining balance after the Chapter 13 repayment plan is over.
Defaulting on your loan:
If you default on your student loan, the government has several legal ways to collect including:
- Imposing a 25% collection fee and an agency commission of about 28% of the principle plus penalties and interest
- Seizure of federal income tax refunds until your student loans are paid
- Seizure of up to $750 (or up to 15%) of any income paid for any federal benefits you qualify for including Social Security retirement or Social Security disability until the loan is repaid
- Garnish 15% of your income without suing you first
- Suing you for any outstanding debt and placing liens on any property.
If you are facing bankruptcy with student loan debt, a qualified bankruptcy lawyer can work with you on your options. Have your case evaluated today for free. Student loans don't go away with bankruptcy, but there is help.