Debts That Can And Cant Be Discharged In Chapter 7 Bankruptcy
Chapter 7 should dismiss most of the debts you owe, but there are some hard-and-fast debts that cant be discharged in Chapter 7.
The list of non-dischargeable debts includes:
- Child support
- Student loans must prove undue hardship
- HOA fees if you surrender your home or condo
- Any other form of unsecured debt.
Deferment And Forbearance Plans
Deferment and forbearance are another way of putting a pause on payments. The idea is that graduates can gain financial stability without astronomical interest accruing on their debts. That way, when they start making payments again, they can do so without jeopardizing their present well being.
These programs last for up to three years. There will be interest on some of the loans, which lenders add to the end deferment payment. Still, this approach can be a useful tactic, especially if you are unemployed, ill, or in the armed forces.
It is worth noting that deferment and forbearance are not synonymous. If you choose forbearance, you will be responsible for the interest of the subsidized loan. Deferment, on the other hand, comes with several qualifications and will typically last for one year. Guidelines for qualifying come from the Department of Education.
Is There An Income Limit For Chapter 7 Bankruptcy
To automatically qualify for Chapter 7, your disposable income must be below the median level for your state. That number varies from state-to-state. If your disposable income exceeds the median in your state, you still may be able to qualify through a means test that includes looking at your income and reasonable expenses to see if you can get that number under the median income for your state.
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If You Ignore Your Debts
Ignoring your student loan debts is the worst option. Once youre in default on government-held loans which accounted for 90% of all student loans in the 2016-2017 school year the federal government has extraordinary collection powers. It can garnish wages, seize tax refunds or portions of Social Security benefits, and place liens on bank accounts and property.
And unlike other types of debt, there is no statute of limitations on federal student loans. That means that a student loan debtor can be hounded to the grave by the federal bureaucracy or the agency that services loans on behalf of the Department of Education.
Also, after a stipulated number of months of non-payment, a loan can be transferred to a private collection agency. Additional fees and collection costs are then added to the loan balance.
Rather than trying to ignore your student debt problem, its best to take action as soon as possible, even if that means going into bankruptcy.
Navient Services The Loan
Sallie Mae markets student loans, reviews loan applications and loans money. They have nothing to do with you after youve received your loan. As soon as they disperse funds, your loan is passed on to a company called Navient. From this point all of your dealings will be with Navient.
Totally separate from Sallie Mae, Navient is also a private company. They service student loans for Sallie Mae and other loaners. They handle collecting payments as well as granting deferments and forbearances.
Navient does not forgive student loans. You have to apply to the government agency that handles the type of forgiveness youre after. However, oftentimes a Navient representative can point you in the right direction.
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Why Cant People Get Rid Of Student Loans Through Bankruptcy Now
Although not impossible, discharging student loans in bankruptcy is difficult. Due to a 1976 law, student loans are not treated during bankruptcy proceedings like other forms of debt, such as credit card debt or auto loans. This policy stems from a federal commission on bankruptcy laws, which heard testimony that claimed the easy discharge of educational loans in bankruptcy could undermine federal student loan programs. Congress was concerned that students might borrow thousands of dollars from the federal government, graduate, declare bankruptcy to have their student loans discharged and never repay their educational debt.
In an extension of the Higher Education Act of 1965, Congress passed the 1976 law, which made borrowers wait five years after the first student loan payment was due before they could have the loan discharged through bankruptcy. Congress created an exception that allowed for discharge within that five-year period if the loan caused undue hardship.
Currently the undue hardship exemption is the only way to have student loans discharged in bankruptcy that is a much higher threshold than many other common forms of debt. This higher threshold includes both federal student loans and, since 2005, most forms of private student loans.
When To File An Adversary Proceeding: Chapter 13
In a Chapter 13 bankruptcy, when you can file an adversary proceeding also depends on the bankruptcy court rules where you live. Regardless of when you file, your student loan nightmare will not be complete if you win the adversary proceeding. That’s because you have to wait until you’ve completed the necessary Chapter 13 plan payments and earned your discharge order for your other debts before your student loans will be discharged.
If you are allowed to file the AP early in your case, you might get the proceeding over with sooner and obtain a decision on your student loans. The table below compares Chapter 7 and Chapter 13 bankruptcy.
|Comparing Bankruptcy Options|
|Varies by state|
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Secured And Unsecured Debt
Most credit card debt is unsecured, meaning that there are no liens on the property you purchase with the credit card. Unsecured debt is usually discharged completely in Chapter 7 bankruptcy, but Chapter 13 bankruptcy may require you to pay a portion of what you owe. If you have a secured credit card, your creditors may have a lien on whatever you purchased. If this is the case, they can repossess these items for nonpayment even if you file for bankruptcy.
Sallie Mae Loans The Money
What Sallie Mae is and what role they play in granting and managing student loans can be confusing. A quick history should clear this up.
Sallie Mae, or the Student Loan Marketing Association, was founded in the early 70s as a federal government-sponsored organization. But it later became privatized. Its currently a publicly traded company on the Nasdaq Stock Market.
It no longer answers to any government federal, state or otherwise. As a private lender, borrowing from Sallie Mae is no different from borrowing from your bank, credit union or a car dealership.
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Student Loan Debt Is Crushing Americans: 4 Essential Reads
Posted: 1 day ago · As things stand now, student loan borrowers are mostly barred from discharging their loans through bankruptcy. However, under the proposed FRESH START through Bankruptcy Act , borrowers can get their federal loan debts discharged if they prove that the debt caused undue hardship during the first 10 years of payment.
Is Bankruptcy The Right Choice For You
There’s no doubt bankruptcy is a last resort option.
“It’s one of the hardest things people can do,” says Ed Boltz, a Raleigh/Durham, N.C.-based bankruptcy attorney and past president of the National Association of Consumer Bankruptcy Attorneys . But if you are unable to repay your way out of debt, it’s better to file sooner rather than later. Filing for bankruptcy can erase or help you repay most debts, except for back taxes, child support, student loans and a few other types . It can also protect you from aggressive bill collectors while you’re working out a debt relief plan.
Bankruptcy may be the right choice for you if
- You don’t have enough money left to pay down debts after you meet your basic expenses.
- You’re regularly using credit cards to pay for food, gas, utility bills and other necessities .
- You’re paying your credit card bills with another credit card.
- Your wages are being garnished to pay debts, leaving you unable to meet basic expenses.
- You might be able to save your home by declaring bankruptcy.
- You’re working several jobs and unable to make a dent in your debt, and a credit counseling agency couldn’t work out a repayment plan for you.
- You’re so stressed out financially that it’s undermining your health and relationships.
Bankruptcy may be the wrong choice for you if
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Student Loans In Chapter 13 Bankruptcy
Posted: 7031 Koll Center Pkwy, Pleasanton, CA 94566. master:2021-09-01_13-27-00. Except in rare circumstances, student loans cannot be discharged in bankruptcy. But if you are struggling to make your student loan payments, filing for Chapter 13 bankruptcy can allow you to delay or reduce your monthly obligations. Read on to learn more about how Chapter …
How To Get The Ball Rolling Not A Slam Dunk
Natalie wants readers to understand this is not a slam dunk. First, you need to find a bankruptcy attorney who is familiar with the undue hardship rules, as many are not.
It is important to understand that you will be filing for bankruptcy, and, as you are claiming an undue hardship, this will be decided in what is called, An Adversary Proceeding in bankruptcy court. This is a real lawsuit, as the creditor wants to be paid and you are trying to demonstrate why the loan should be forgiven.
You will appear before a judge who will most likely use the Brunner Test to decide if you have an undue hardship.
If you can prove all three of these elements, you are entitled to a discharge, but youve got a lot of work to do, beginning with conducting discovery.
Be prepared to provide financial records, tax returns, bank statements showing your financial resources, proof of expenses, housing, utilities, food, etc. You will need to present a detailed picture of your financial life.
She also wants readers to understand that not all student loans are Qualified Education Loans.
For example, a private bank making a loan where the amount exceeds the published cost of attendance might not be a qualified loan and therefore is dischargeable without having to show undue hardship.
Her website is well worth the time for anyone facing crushing student loan debt.
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What Is Included In The Costs To Declare Bankruptcy
First, its important to mention that everyones situation is unique. So, the exact amount that you will pay to file for bankruptcy will depend on your circumstances. Your monthly income and assets, ongoing expenses, living costs, and family size will all have an impact. A Licensed Insolvency Trustee will help you determine what you will need to pay to declare bankruptcy.
Overall, bankruptcy costs include:
- The administrative costs for the bankruptcy process
- Any assets that you must surrender under bankruptcy law to help repay your creditors
- Surplus income payments that are required under bankruptcy law
Whats Included In The Administrative Costs When Filing For Bankruptcy
Administrative fees for filing bankruptcy include government fees, your LITs administrative expenses and payment for your LITs time. If you are declaring bankruptcy for the first time, the basic cost to file in Canada is $1,800. This cost is determined by the Office of the Superintendent of Bankruptcy Canada and can be broken down into nine monthly payments of $200.
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What If I Dont Qualify To Discharge Student Loans Through Bankruptcy
You have many options available to you if you are having a hard time repaying your student loans:
You can see if you qualify for a Repayment Assistance Plan to reduce your monthly payments or a Revision of Terms Plan to give you more time to repay your loans. We provide more details for managing your student debt on our Student Loan Debt page.
Our local debt professionals will be happy to review all of the options available to you. We will personally guide you through all the methods and steps you can take to eliminate your student debt. Request a call today for a free appointment, with no obligations.
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Likelihood Of Discharging Student Loans
Why Is It So Difficult To Discharge Student Loans?
In 1976, Congress prohibited federally guaranteed student loans from being discharged in bankruptcy except under conditions of undue hardship. This was in response to largely unfounded fears of too many student debtors looking for an easy way out of their obligations.
This put student loan debt in the same category as financial obligations like child support, alimony and criminal fines.
In 2005, Congress added private student loans to the list of debts that cannot be discharged.
In most bankruptcy cases, consumers dont even attempt to have student loans discharged. Instead, their lawyers focus on other issues such as .
Austin said that less than 1% of bankruptcy filings include student loans, even when there is a compelling case. He cited a situation in which a single mother on a teachers salary and battling cancer didnt bother filing for bankruptcy, despite more than $150,000 in student loan debt.
However, in most cases, the legal hurdles that have to be overcome are so daunting that most lawyers advise their clients not to seek a discharge for student loan debt in their bankruptcy filing. Also, there are now several income-driven repayment plans such as Pay As Your Earn , Repay As You Earn , Income Contingent Repayment and Income Based Repayment that most borrowers should be able to find a program they can afford.
Surprisingly, about 40% of the cases that are filed, actually are successful.
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Chapter 13 And Student Loans
A case under chapter 13 is often called reorganization. In a chapter 13 case, you submit a plan to repay your creditors over time, usually from future income. These plans allow you to get caught up on mortgages or car loans and other secured debts. If you cannot discharge your student loans based on undue hardship in either a chapter 7 or chapter 13 bankruptcy, there are still certain advantages to filing a chapter 13 bankruptcy. One advantage is that your chapter 13 plan, not your loan holder will determine the size of your student loan payments. You will make these court-determined payments while you are in the Chapter 13 plan, usually for three to five years. You will still owe the remainder of your student loans when you come out of bankruptcy, but you can try at this point to discharge the remainder based on undue hardship. While you are repaying through the bankruptcy court, there will be no collection actions taken against you. You may have other options, depending on how judges decide these cases in your judicial district. For example, some judges allow student loan borrowers to give priority to their student loans during the Chapter 13 plan.
Would Bankruptcy Become An Attractive Way To Get Rid Of Student Loans
Declaring bankruptcy is not an ideal option to deal with student loans because it comes with substantial immediate and long-term consequences. The immediate consequence is that bankruptcy can result in the sale of property to pay off debts. The longer-term consequence is that, depending on the type, Chapter 7 or 13, bankruptcy stays on credit reports for seven to 10 years. The substantial negative mark on credit reports means it will be more difficult to obtain a credit card, auto loan and mortgage. When any form of credit is obtained, the interest rates are likely to be much higher with a bankruptcy on record.
Another solution to a large student loan debt is to enroll in an income-driven repayment plan, such as Revised Pay As You Earn. These plans limit the amount of the monthly payment on federal student loans to a percentage of your discretionary income, which is the difference between your income and 150% of the state poverty guideline, adjusted for family size.
After 20 years of repayment for undergraduate loans , the remaining balance is forgiven. If the new bill becomes law, borrowers in income-driven repayment plans will have a choice. They can either pursue bankruptcy after 10 years and suffer the consequences, or continue paying through loan forgiveness.
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What Year Did Student Loans Become Nondiscahrgeable
Student loans first became nondischargeable in bankruptcy in 1976 as part of Â§ 439A Higher Education Act of 1976. Except in cases of undue hardship, Section 439A prohibited debtors from discharging student loan debt until 5 years after the start of the repayment period.
Why are student loans exempt from bankruptcy? Student loans are exempt from bankruptcy because many politicians feared that young people would borrow substantial sums to pay for college and then discharge their student loans in bankruptcy right after graduation. As a result, starting in the early 1970s, Congress began changing the bankruptcy laws to require a borrower to prove undue hardship before she could discharge her student loan debt.
Debts You Didnt List In Your Asset Case
Contrary to common belief, not including a debt in bankruptcy isnt an option. Youre required to list all of your debts when you file for bankruptcy. If your case is an asset case , and you fail to list a debt, the omitted debt is nondischargeable.
- money owed as a result of wrongful death or personal injury to another caused by operating a car, boat , airplane , or other vehicle under the influence of alcohol or drugs.
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