Filing for Student Loans Bankruptcy: What You Need to Know
Through bankruptcy, it is possible to get rid of student loans. Most courts use a strict standard to decide if you can get rid of your student loans and whether or not you meet this standard depends on the bankruptcy court you go to.
To get private and federal student loans wiped out in bankruptcy, you must show that paying back the loans would cause you and your dependents “undue hardship.” That’s a higher standard than what people who file for bankruptcy have to show to get rid of their credit card debt, personal loans, or past-due utility bills. But if you have a good reason, it’s often worth showing that you meet this standard.
You don’t have to file for bankruptcy if you can’t afford your loan payments. Since bankruptcy can hurt your credit and finances in a big way, you should look into other options first. If you decide to file for bankruptcy, here’s how it can help eliminate or lower your student loan debt.
What is Student Loan Bankruptcy?
You may have heard that bankruptcy prevents you from getting rid of student loans. Unfortunately, that statement makes the truth sound too simple. Some student loans can be canceled, but the requirements are higher. However, the process is more complicated than other types of debt.
It would also make it possible to keep the option to get out of private student loans and federal student loans. This is especially true for those that have been due for less than ten years because of “undue hardship.”
If a new bipartisan bill is passed, it might be easier to file for bankruptcy to get rid of student loans. With the Fresh Start Through Bankruptcy Act, people with federal student loans would be able to file for bankruptcy again ten years after their first payment is due.
Can You Get Out of Paying Back Your Student Loans If You File for Bankruptcy?
Students often take out a lot of student loan debt to pay for college. Student loan debt is notoriously hard to get rid of in bankruptcy, and its interest rate can be much higher than other kinds of debt.
The bankruptcy laws were not made to deal with student loans in particular. Instead, the courts may look at a person’s debts to decide if paying back their loans would be too hard for them. In some cases, you can get out of your student loans in bankruptcy court. However, the process is complex, complicated, and takes a long time.
Chapter 7 bankruptcy is most often used to eliminate student loan debt. For Chapter 7 bankruptcy, a person’s assets and income must be below a certain threshold, which varies from state to state. Also, the courts use a set of criteria called the Brunner test to determine if the filer will have difficulty paying back the loan obligations. If the court finds that paying back the loan would put the person who filed for bankruptcy in financial trouble, it may be possible to get rid of the student loans.
Getting rid of your college debts can be challenging if you have many. This is especially true if you have many student loans. Even though bankruptcy is an option, it can be difficult to use because it can be hard to prove that paying back your student loan debt would make your life too complicated.
To qualify, your income and assets must be below a certain threshold, which varies from state to state. Even if your income and support make you eligible for bankruptcy, you still have to pass the Brunner test. This is used to decide if it will be too hard for you to pay back your loan. When making this decision, the court will look at several things. This includes your current monthly income, what you expect to make each month and your current financial obligations. It’s important to remember that this process can take months and will require a lot of paperwork, time, and effort to go through correctly.
If you show that paying back your student loan debt would be too hard for you, the bankruptcy court may let you get out of paying it. But before filing for bankruptcy, you should look into other options, such as refinancing or consolidating your loans. This will help you avoid the costs and lengthy process of insolvency.
How to File for Bankruptcy on Student Loans
If you are considering filing for bankruptcy on your student loans, falling behind on your payments will significantly affect your life. The federal government can keep your tax refund. They can then use it to pay off your federal student loans if you need to catch up on payments or default and this can hurt your credit score and other finances.
Student debt is likely one of your problems with your money. If you only have student debt, you won’t be able to get rid of it through bankruptcy. Filing for bankruptcy on your student loans is challenging, and it doesn’t mean you won’t have any more debt. But if you have bad credit, bankruptcy could get you back on your feet faster than trying to pay off your debts.
To get student loans forgiven through bankruptcy, you must file either Chapter 7 or Chapter 13. Then, you’ll need to take one more step: file an AP or adversary proceeding. If you want to get rid of your student loans, you must file the AP.
To do this, you must fill out much paperwork and list your assets, income, debts, and expenses. The bankruptcy court will send an impartial trustee to meet with your creditors to confirm your debts. Before you can go to court, you must also go through credit counseling.
When people fall behind on their bills, filing for bankruptcy can help them catch up by stopping collection efforts and the downward debt spiral. When you file for bankruptcy, debt collectors must leave you alone until the court permits them to start collecting again or until your case is over.
What Happens If the Bankruptcy Court Doesn’t Cancel My Loans?
Four different things could happen when you file for Chapter 7 or Chapter 13 bankruptcy. You could have your student loans and other debts wholly wiped out, your loan could be partially wiped out, or you could have to pay back your loan with better terms, like a lower interest rate or monthly payment.
During the bankruptcy process, you may also need help to change your loan terms. This is something you should be aware of. If the courts don’t think that your “undue hardship” claim is enough to let you file for bankruptcy, you may have to keep working to pay back your loans.
Final Thoughts
Some people can get rid of their student loan debt by filing for bankruptcy but to be eligible, the borrower must show that they will need more time to repay their loan. To do this, you can file for Chapter 7 bankruptcy and pass the Brunner test. The borrower’s total income and assets must be less than a certain amount, which is set by state law.
The court will also examine the filer’s income, possible income, and current financial obligations to see if paying back the loan will be hard. If the court decides it would, the loan could be forgiven in bankruptcy court. Before filing for bankruptcy, thinking about other options, like loan consolidation or refinancing, is essential.
