Although it’s a tough choice, declaring bankruptcy can provide a means out of financial crisis. Examining discharge and cancellation choices during bankruptcy might be rather important for people loaded with student loans. Knowing these alternatives’ workings and the procedures involved will enable borrowers to make wise decisions.
Understanding Student Loan Discharge in Bankruptcy
Student loans have long been famously difficult to discharge in bankruptcy. By means of an adversary proceeding—a second litigation inside the bankruptcy case—borrowers must prove “undue hardship.” Complete information about dismissing student loans in bankruptcy is available from the U.S. Department of Education.
New rules released by the U.S. Department of Justice and the Department of Education in 2022 aim to expedite procedures. Under this direction, borrowers complete an attestation form detailing their financial circumstances, therefore facilitating the DOJ’s assessment of unnecessary hardship.
The Brunner Test and Undue Hardship
The primary standard for discharging student loans in bankruptcy is the Brunner Test. This three-part test requires borrowers to demonstrate:
- Inability to Maintain a Minimal Standard of Living: Repaying the loans would prevent the borrower from meeting basic living expenses.
- Persistent Financial Hardship: The financial situation is unlikely to improve throughout the repayment period.
- Good Faith Efforts to Repay: The borrower has made efforts to repay the loans prior to filing for bankruptcy.
Private Student Loans and Discharge Options
Private student loans are more difficult to discharge than government ones. Still, new judicial decisions provide some hope. Loans may be dischargeable in situations when they are not regarded as “qualified education loans,” such those exceeding the cost of attendance or utilized for unaccredited colleges.
For instance, a federal judge decided recently that some private student loans that fell short of the definition of an educational loan could be discharged under bankruptcy.
Alternative Options for Loan Relief
If discharging student loans in bankruptcy is not feasible, borrowers have other options:
- Income-Driven Repayment Plans (IDR): Adjust monthly payments based on income and family size. After 20-25 years of payments, the remaining balance may be forgiven. Learn more about IDR plans here: Income-Driven Repayment Plans – Federal Student Aid.
- Public Service Loan Forgiveness (PSLF): Borrowers working in public service may qualify for loan forgiveness after 120 qualifying payments.
- Temporary Expanded PSLF (TEPSLF): An alternative option for borrowers who did not meet PSLF criteria due to payment plan issues. For eligibility and application information, visit TEPSLF Program – Federal Student Aid.
Filing for Student Loan Discharge: Step-by-Step Process
- Consult a Bankruptcy Attorney: A qualified attorney can provide guidance on navigating the bankruptcy and student loan discharge process.
- File for Bankruptcy: Choose between Chapter 7 or Chapter 13, depending on financial circumstances.
- Initiate an Adversary Proceeding: This separate lawsuit is necessary to argue for loan discharge under the undue hardship standard.
- Complete the Attestation Form: Provide detailed financial information to support the hardship claim.
- Prepare for the Court Hearing: Present evidence to support the claim of undue hardship, including financial records, medical bills, and employment history.
Important Considerations and Resources
- Legal Representation: Given the complexities of bankruptcy law, consulting a qualified attorney is crucial. You can find attorneys specializing in student loan bankruptcy cases through the National Association of Consumer Bankruptcy Attorneys (NACBA).
- Credit Reporting Implications: A bankruptcy filing remains on the credit report for up to 10 years, impacting future loan applications and financial opportunities.
- Tax Implications of Loan Discharge: Loan forgiveness under certain programs may be considered taxable income. However, under the American Rescue Plan, loan forgiveness from 2021 to 2025 is not considered taxable.
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FAQ
Can Student Loans Be Partially Discharged?
Yes, in some cases, the court may allow partial discharge of student loans if the borrower proves undue hardship, reducing the overall debt amount.
What Is Adversary Proceeding In Bankruptcy?
An adversary proceeding is a separate lawsuit filed within bankruptcy to request student loan discharge by proving undue hardship, requiring additional evidence and documentation.
Are Parent PLUS Loans Dischargeable In Bankruptcy?
Parent PLUS Loans can be discharged in bankruptcy, but the borrower must prove undue hardship, just like other federal student loans, through the court process.
Does Bankruptcy Affect Loan Forgiveness Programs?
Filing for bankruptcy doesn’t automatically disqualify borrowers from loan forgiveness programs, but the impact varies based on specific program guidelines and eligibility criteria.
What Happens If Discharge Request Is Denied?
If the discharge request is denied, the borrower remains liable for the debt but may explore other relief options, such as income-driven repayment plans or loan consolidation.
Can Bankruptcy Discharge Private Loan Interest?
Yes, if a court determines undue hardship, both the principal and interest on private student loans may be discharged, but it’s typically more difficult than federal loans.
