Can You File Bankruptcy On Student Loans
Prior to filing for student loan bankruptcy, you will need to file for either Chapter 7 or Chapter 13 bankruptcy. After that, you’ll need to start an adversary procedure (AP) in order for your student loans to be forgiven.
Basically, you have to show that paying back the loan would be too hard for you.
BECAUSE OF THIS
It’s harder to get rid of student loans than other types of uninsured debt.
Filing an adversary case is an extra step that needs to be taken in order to get student loans forgiven in bankruptcy.
Before you file for bankruptcy, you might want to look into other options, such as deferment, forbearance, and income-driven payments.
The IRS could take your tax refund and use it to pay off your government loans if you don’t pay your loans on time.
After a three-year break made possible by COVID-19 relief law, student loan payments started up again in October 2023. Because of the SAVE program, if you can’t pay, your monthly payments may be lowered to a level that you can handle. Some people who work for the government, non-profits, or are sick can get their loans forgiven.
How Bankruptcy for Student Loans Works
It is possible to get rid of student loans, but the process is more difficult than getting rid of other kinds of debt. You can’t be sure that your student loans will be forgiven just because you file for bankruptcy.
You must first file for Chapter 7 or Chapter 13 bankruptcy. After that, you’ll need to take one more step and file an adversary case. This is a claim that is mostly about a bankruptcy case that was filed in the same court.
Forgetting to make your bills on time can hurt your finances in many ways, including lowering your credit score.
Think about the pros and cons of not making payments and asking for student loan bankruptcy before you decide.
Tips on How to File for Bankruptcy
To file for Chapter 7 or Chapter 13 bankruptcy, you have to fill out a lot of forms and give information about your assets, income, debts, and spending. The bankruptcy court will send an independent trustee to talk to your creditors about your bills. You also need to go to credit therapy.
What Does Chapter 7 Mean?
In Chapter 7 bankruptcy, also known as “liquidation,” the trustee will sell off your things that are not protected. Depending on the state, your home, cars, and some other things may not be taxed. The manager pays your creditors as much of your debt as possible with the money, and the court forgives the rest.
The last time you filed for Chapter 7 bankruptcy was eight years ago. You can’t have had another one since then. Also, your monthly income must be less than the state’s normal income, or you must pass a means test.
You can’t get rid of some bills, like taxes, alimony, and child support. You can file for student loan forgiveness once your case is over.
What Does Chapter 13 Mean?
Reorganization, or Chapter 13, is what a lot of people do when they can’t pass the Chapter 7 means test. They can also file if they don’t want to let the bank take their house.
In Chapter 13, a debtor makes a payback plan that uses up to all of their extra income to pay back their creditors over the course of three to five years. The trustee is in charge of overseeing payback. Each month, the debtor makes a payment, which is then split between the creditors according to the repayment plan.
The bankruptcy court will decide how much you will have to pay each month for your debts, including your student loans.
Putting in for bankruptcy for student loans
Before you file for bankruptcy, think about:
Possible that you owe more: The bankruptcy court will choose how much each debt will get each month. You might end up paying more interest on your student loans if you have other bills that are more important to you than your student loans.
If your only debt is a student loan: If you don’t have any other debt, it’s not likely that you will be able to dismiss your student loan.
Type of loan you have: If you file for bankruptcy, you may have a better chance of getting rid of or settling a private student loan than a government one. This is because government student loans have payment plans that are based on your income, but private student loans do not.
It is possible for bankruptcy court to forgive all private loans that cover more than what is called a “qualified higher education expense,” like living costs.
File fees: If the court doesn’t waive them, you have to pay the court file fees.
The court might decide that your situation isn’t bad enough for a student loan settlement if you have a lawyer. Think about a lawyer who could help you for free or for a small fee. To find a lawyer, go to the website of the American Bar Association or the bar association in your state.
For up to 10 years, bankruptcy will show up on your credit report. If you file for bankruptcy, your credit score is likely to go down a lot.
Putting in an adversary proceeding
When you file for bankruptcy, you have to take an extra step and file an adversary case for your student loans. The proceeding will decide if your loan should be forgiven.
A move in November 2022 recently made the paperwork for the adversary proceeding easier.
In the past, proving undue suffering was hard, took a lot of time, and was often quickly turned down. With the new process, the filing is cut down to 15 pages that describe the debtor’s present and future financial situation as well as how paying back the loans would affect their life.
Since it was reformed, more than 99% of users have had at least some of their student loan debt forgiven.
Section 523(a)(8) of the U.S. bankruptcy code spells out the stricter requirements for getting rid of student debt.
When to Bring an Opposition Case: Chapter 7
If you file for Chapter 7, you can start the adversary process as soon as you file for Chapter 7. There is a chance that you can still get your student loans forgiven even if you have already filed for Chapter 7 bankruptcy and your case has been closed. This depends on the state where you live.
Reopening your Chapter 7 case is the first thing you need to do if it has already been closed. Just to be clear, this doesn’t start the bankruptcy process over or take away the debt relief you may already have gotten.
When to Bring an Opposition Case: Chapter 13
The rules in your state’s bankruptcy court will tell you when you can file an adversary case during a Chapter 13 bankruptcy.
Your nightmare with student loans will not end even if you win the adversary case. It doesn’t matter when you file. Before your student loans are forgiven, you have to finish the payments on your Chapter 13 plan and get a discharge order for all of your other bills.
If you can file the adversary case early, you might be able to get it over with faster and get a decision on your student loans.