Student Loan Bankruptcy Reform: Debates And Potential Changes – To file for student loan bankruptcy, you must first file for Chapter 7 or Chapter 13 bankruptcy. You will then need to file an Anti-Procedure (AP) for your student loans to be considered for repayment. Basically, you have to prove that repaying the loan will cause undue hardship.

You can pay off student loans in some cases, but the process is more complicated than with other types of debt. A student loan bankruptcy does not guarantee that your student loans will be discharged.

Student Loan Bankruptcy Reform: Debates And Potential Changes

Student Loan Bankruptcy Reform: Debates And Potential Changes

First, you must file for Chapter 7 or Chapter 13, and then you must take the additional step of filing an adversary proceeding. Falling behind on your payments can have a significant negative impact on your financial life, including lowering your credit score. If you decide to default and file for student loan bankruptcy, weigh the pros and cons.

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By March 9, 2022, you may file an active bankruptcy case at the request of the U.S. Department of Education to the U.S. Department of Justice. This pause is effective from the beginning of August 2023.

Filing for Chapter 7 or Chapter 13 bankruptcy requires filing paperwork and identifying your assets, income, debts, and expenses. The bankruptcy court will appoint an impartial trustee to meet with your creditors to confirm your debts. You should also undergo credit counseling.

In a Chapter 7 bankruptcy, or liquidation, the trustee will sell your non-liquidating assets. Exempt assets vary by state, but often include your home, cars, and other valuables. The trustee uses the proceeds to pay off as much of your creditors as possible and sends the rest to the court.

To file for Chapter 7, you must not have had another Chapter 7 bankruptcy in the past eight years. Also, your current monthly income must be below the state median income or you must pass the test. Some debts cannot be paid, such as taxes, alimony, or child support. After your job is over, you can apply for student loan repayment.

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Many people file for Chapter 13 bankruptcy or reorganization because they cannot go through Chapter 7. They can also apply if they don’t want their homes back.

Chapter 13 involves setting up a repayment plan that uses up to 100% of the debtor’s disposable income to repay creditors over three to five years. Payment is controlled by the trustee, who collects monthly payments from the debtor and distributes it to creditors as outlined in the repayment plan.

Bankruptcy stays on your credit history for up to 10 years. Your credit score will likely be significantly reduced by bankruptcy.

Student Loan Bankruptcy Reform: Debates And Potential Changes

With student loans, you have to take the extra step of filing for bankruptcy. The adversary process determines whether or not you owe the debt.

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The paperwork included in the adversary proceeding is a “complaint.” The complaint will include administrative details, such as your bankruptcy case number and your reasons for seeking to discharge your student loans into bankruptcy, such as excessive hardship.

Student loans have strict requirements for repayment, which are described in Section 523(a)(8) of the US Bankruptcy Code.

If you file for Chapter 7, you can file an adversary proceeding after you file for bankruptcy. If you’ve filed for Chapter 7 bankruptcy and your business is closed, depending on where you live, you may be able to file a claim to pay off your student loans.

If your Chapter 7 case is closed, you must first file for bankruptcy. This process does not reopen the bankruptcy or cancel your debt payment.

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Whether you can file an adversary proceeding in Chapter 13 bankruptcy also depends on the rules of the bankruptcy court where you live. No matter when you apply or win the student loan process, your student loan dreams won’t end. That’s because you have to wait until you file the required Chapter 13 and receive a payment order on your other debts until your student loans are discharged.

If you are allowed to file the adversary process early, you may be able to complete the case faster and get a decision on your student loans. The table below compares Chapter 7 and Chapter 13 bankruptcy.

Must have disposable income to pay off debt within three to five years; Total secured and unsecured debt must not exceed $2,750,000

Student Loan Bankruptcy Reform: Debates And Potential Changes

Collection activity stops; all debts are voided, deemed by the court to be unpaid and never to be paid, such as taxes and child support.

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Collection activity stops; can delay repayment and give you more time to make mortgage payments; the balance remaining on unsecured debts after fulfilling the payment plan on senior and secured debts

To pay off your student loans, you must show that defaulting on them will cause you undue hardship and you must meet certain conditions.

Your student loan lenders—which can be payday lenders, servicers, or collection agencies, depending on the type of loan you have and your delinquency—must meet certain criteria.

Most states use the Brunner test to determine what constitutes undue hardship. Essentially, the test assesses a person’s current financial situation, their future situation, and whether they are making a good effort to repay their loans.

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A number of states use the circumstantial test. It does not care whether you have made honest efforts to pay back your loans, such as looking for a job, maximizing your income and minimizing your expenses.

The common thread in these examples is that your situation may not improve enough to allow you to repay the debt. In addition, your expenses, which the bankruptcy court will consider, should include only reasonably priced necessities, not luxuries or unnecessary purchases such as restaurant meals, brand name clothing, vacations, or even giving money to an independent older child.

A student loan holder may not oppose filing for bankruptcy if your circumstances are unduly burdensome or if they want to avoid court costs.

Student Loan Bankruptcy Reform: Debates And Potential Changes

For federal loans, the Department of Education charges the loan holder that the costs of litigation exceed one-third of the total amount owed on the loan, including principal, interest, and collection costs. Private student lenders will likely use similar logic.

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If you are claiming an undue hardship for student loan repayment based on a physical or mental disability, you do not need to go to bankruptcy court. You may qualify for automatic discharge under the general and permanent disability streams.

Other situations where you can avoid bankruptcy court and administrative discharge are death, closed school, false certificate, unpaid restitution and debtor’s defense.

Federal student loan debt cancellation, announced by the Biden administration in August 2022 but later ruled unconstitutional by the US Supreme Court on June 30, 2023, would be an option for some student loan borrowers, including:

Individuals and married couples cannot earn more than $125,000 and $250,000,000, respectively, to qualify for debt relief under this policy. Borrowers can even get refunds for payments made during the COVID-19 payment pause.

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In response to the Supreme Court decision, Biden announced changes to student loan management, including raising the minimum payment amount to 10% per month for undergraduate loans and 5% per month for undergraduate loans. There are still several ways borrowers can rely on their careers and income-based repayments to pay off their debt.

On June 30, 2023, the Supreme Court ruled that the Biden administration did not have the authority to cancel $20,000 in federal student debt per borrower.

Three years of forbearance on student loan payments and interest must end. Student loan interest will begin to accrue on September 1st, and required payments will begin in October.

Student Loan Bankruptcy Reform: Debates And Potential Changes

You can get out of student loans through bankruptcy, though not always. This process is complicated. Before you decide to discharge your student loans through bankruptcy, consult with a financial advisor to review your alternatives.

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The easiest way to get rid of student loans is to pay them off. There are a variety of programs and resources available to help manage student loan debt. If you think you may be having trouble repaying your student loans, contact your lender. You can discharge your student loans in bankruptcy, but the process is complicated.

For private borrowers, student loans can be paid off after 10 years if the borrower meets the government service requirements.

Going through the bankruptcy process does not guarantee a certain outcome. Bankruptcy court may make it extremely difficult to repay your student loans and agree to pay off your loans in full. Or, you may have to pay back the debt, which may now include collection costs, accrued additional interest, court fees and attorney fees. Alternatively, your loans can be partially paid off or restructured.


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