Bankruptcy and Student Loans
Jan. 3, 2024
Dealing with student loans can feel like an insurmountable challenge. The burden can seem heavy and the path forward unclear. But know that you're not alone in this struggle, and there are options available to you. As a bankruptcy attorney, I've helped countless individuals navigate the complexities of student loans and bankruptcy. If you need support, I am here to provide you with valuable insights about how student loan discharge differs from regular bankruptcy and the various grounds for discharging student loans. Reach out to my firm in Vineland, New Jersey — serving individuals throughout South Jersey — today for support.
How Does Student Loan Discharge Differ from Regular Bankruptcy?
Student loans present a unique challenge when it comes to bankruptcy. Unlike other forms of debt such as credit card bills or medical expenses, student loans are typically not dischargeable unless you can demonstrate undue hardship. This might sound daunting, but I'm here to guide you through the process. While the rules are indeed stricter, there are still avenues to explore that could potentially bring you some relief.
Chapter 7 Bankruptcy and Student Loans
Chapter 7 bankruptcy is a common option for individuals grappling with overwhelming debt. However, it's important to know that student loans are usually not dischargeable under Chapter 7. This is unless you can prove undue hardship, meaning repaying your loans would cause you and your dependents significant financial strain. It's a high bar to clear, but together we can evaluate your situation and determine the best course of action.
Chapter 13 Bankruptcy and Student Loans
Chapter 13 bankruptcy, also known as a wage earner's plan, offers another path. This form of bankruptcy allows you to restructure your debts and create a manageable repayment plan. While student loans generally aren't dischargeable under Chapter 13, this option can still provide some relief by consolidating your debts and lowering your monthly payments.
Grounds for Student Loan Discharge
To discharge your student loans, you must prove undue hardship. This is where things can get a bit complex as there are several tests used to determine this, including the Brunner Test and the Totality of Circumstances Test. These tests assess various factors like your income, expenses, and future earning potential to ascertain if repaying your loans would cause undue hardship.
Undue hardship is the lynchpin for discharging student loans in bankruptcy. It refers to a situation where repaying your loans would prevent you from maintaining a minimal standard of living. Proving undue hardship can be a tough nut to crack, but with my experience and expertise, we can build a compelling case to present to the court.
The Brunner Test
The Brunner Test is one of the tools used to establish undue hardship. It involves demonstrating three things: 1) that you can't maintain a minimal standard of living while repaying your loans, 2) that your financial situation is unlikely to improve significantly in the foreseeable future, and 3) that you've made good faith efforts to repay your loans.
The Totality of Circumstances Test
The Totality of Circumstances Test takes a broader view. It considers a range of factors like your income, expenses, family size, and future earning potential. This test allows the court to take a holistic look at your financial situation and decide if repaying your loans would cause undue hardship.
Besides the Brunner Test and the Totality of Circumstances Test, there may be other tests used in specific jurisdictions, such as the Johnson Test or The No Educational Benefit Test. The Johnson Test evaluates whether, under your current budget, you have any disposable income that could be used towards paying off your student loans. If not, you might qualify for a student loan discharge. It's worth noting that the interpretation and application of the Johnson Test may vary across different courts.
The 'No Educational Benefit' Test is a relatively new test that's still being explored in some jurisdictions. Under this test, if you can prove that your education has not led to any economic benefit, you may be able to discharge your student loans in bankruptcy. However, this is still a grey area in the law.
Remember, the bankruptcy code and its interpretation can vary significantly across districts. Therefore, it's always advisable to consult with a bankruptcy attorney who is well-versed in the laws of your specific district.
Discharging Cosigned Student Loans
Cosigned student loans add another layer of complexity to the discharge process. When you cosign a loan, you essentially vouch for the primary borrower and agree to take on their debt if they default. This means that even if you, as the primary borrower, file for bankruptcy and discharge your liability for the loan, the cosigner remains on the hook for repayment.
While this can seem like an intractable problem, there are still options to consider. In some cases, it might be possible to argue that the cosigner would experience undue hardship if forced to repay the loan. Alternatively, filing for Chapter 13 bankruptcy could potentially provide some relief. This could allow for the creation of a payment plan that considers the cosigner's financial situation. It's important to remember that every case is unique, and these options may not be viable or beneficial in every situation. It's always recommended to seek the advice of an experienced bankruptcy attorney when navigating these complex issues.
Consequences for Ignoring Your Loans
Ignoring your student loans is never a good idea. It can lead to a series of serious consequences that can significantly impact your financial health and overall quality of life. Here are some potential outcomes you may face if you choose to ignore your student loan debt:
Wage Garnishment: Your lender or loan servicer has the right to garnish a portion of your wages to repay your student loans. This means they can take money directly from your paycheck, leaving you with less income for your other expenses.
Tax Refund Offsets: If you're due a tax refund, it can be seized to repay your student loan debt. This is known as a tax refund offset, and it can be applied to both federal and state tax refunds.
Damage to Credit Score: Defaulting on your student loans can severely damage your credit score. This can affect your ability to borrow money in the future, making it harder to get approved for things like credit cards, car loans, or mortgages.
Collection Costs: If your student loans go into default, you may also be responsible for collection costs. These costs can be substantial, adding significantly to your overall debt.
Loss of Eligibility for Federal Aid: Defaulting on your student loans can make you ineligible for further federal financial aid. This could potentially hinder your ability to return to school or pursue further education.
It's crucial to take your student loan debt seriously and explore all available options for managing it. Remember, ignoring the problem will not make it go away; in fact, it will likely only make things worse.
Take Control of Your Situation
If you're struggling with student loans and considering bankruptcy, know that I'm here to help. As an experienced bankruptcy attorney, I have the knowledge and experience to navigate the complexities of discharging student loans. You don't have to face this challenging situation alone. Let's work together to find the best solution for your financial future — I'm here to help you every step of the way.