Bankruptcy and student loans are critical areas of concern for many students and parents, as they grapple with the strain of educational debt. Understanding the discharge options available in bankruptcy proceedings can offer a glimmer of light on financial stability for those burdened by student loan obligations. Our Florida bankruptcy lawyers provide an overview of how bankruptcy can impact student loans and potential relief methods.
Understanding Bankruptcy and Student Loans
Bankruptcy offers a legal resolution for persons unable to repay their debts. Key chapters relevant to personal bankruptcy include:
- Chapter 7 (Liquidation Bankruptcy): This option allows for the discharge of debts by liquidating the debtor’s assets.
- Chapter 13 (Reorganization Bankruptcy): This form involves reorganizing debts and creating a plan to repay them over three to five years.
Discharging student loans has proven difficult due to strict requirements set by federal laws. In short, the debtor must prove “undue hardship” to secure a discharge.
Discharge Options for Student Loans in Bankruptcy
Undue hardship is defined as a proposed accommodation involving difficulty or expense to bear. Understanding the options and legal tests for discharging student loans can guide parents and students through the complex landscape of bankruptcy:
Undue Hardship Exception: The primary avenue for discharging student loans involves proving undue hardship, typically assessed through the Brunner Test, which requires showing:
- Inability to maintain a minimal standard of living if your student loan is repaid.
- You have made good-faith efforts to repay the loans.
- The likelihood that your financial hardship will persist during the repayment period.
Some jurisdictions use alternative criteria for discharging student loans, but the Brunner Test remains the standard. Based on age, if it is deemed likely that you will remain poor for the rest of your life, you stand a better chance of being a suitable candidate for discharge. Some alternatives to the Brunner Test are:
- Chapter 7 Bankruptcy: In Chapter 7, discharging student loans involves filing a separate action known as an adversary proceeding to demonstrate undue hardship.
- Chapter 13 Bankruptcy: Chapter 13 does not typically result in a direct discharge of student loans, but it can reorganize your debt and potentially lower payments.
In some cases, if any remaining balances on your loan exist at the end of the repayment period, they may be discharged if undue hardship can be proven.
Alternative Solutions Outside of Bankruptcy
The concern that bankruptcy comes with implications is easily understood. Nobody wants this on their records. However, some alternate solutions to bankruptcy include:
- Income-Driven Repayment (IDR) forgiveness: An adjustment for your monthly payments is calculated based on your income and family size.
- Loan forgiveness programs such as the Public Service Loan Forgiveness (PSLF) and the Teacher Loan Forgiveness, can help to cancel your loans if you work within the public service or as a teacher.
- Refinancing and consolidation can give you the option of lower interest rates or combining multiple loans into one, making the repayment options easier to manage.
Whichever option you choose, it is best to speak with a qualified bankruptcy attorney to help you navigate your bankruptcy woes.
What Can You Do if You Are Considering Bankruptcy for Student Loans
If you have gotten to the point where bankruptcy is necessary, the following steps will help you be better informed:
- Document all your financial information that will help assess your full financial situation.
- Consult a bankruptcy attorney as they will provide tailored guidance to your specific situation.
- Familiarize yourself with the bankruptcy process and what you should expect during court proceedings.
Legal matters are often scary but with expert guidance, you can navigate through your bankruptcy process with ease.
Call Us Today to Discuss Your Options
If you or a loved one is considering bankruptcy due to overwhelming student debt, your next step should be scheduling a consultation with the experienced attorneys at the Law Offices of Jeffrey Herzog, P.A. Call us today, we are ready to assist you with your case.