Overland Park, KS Student Debt Management Lawyer
What Bankruptcy Can & Can’t Do for Student Loan Debt
If you’re struggling with student debt management, you are not alone. The average outstanding student loan in Kansas still has over $32,000 left to be paid on it. Our state is also modestly below the national average. A lot of people have been burdened by the debt load and might consider bankruptcy as a way out.
Bankruptcy can be a tool in student loan debt, so long as you have the right expectations for what the process can achieve and have a good student debt attorney–one who can give you a full range of options–in your corner.
You have two different options in filing for bankruptcy, either Chapter 7 or Chapter 13 (called such for their place in the Bankruptcy Code). Each one has significantly different implications for what happens with your debts.
Chapter 7 Bankruptcy & Student Loans
In a typical Chapter 7 bankruptcy, unsecured debts–which include credit cards and personal loans–can be wiped out if the court approves your plan. But there’s one big exception–student loan debt is not automatically forgiven in a Chapter 7 bankruptcy.
Now, this doesn’t mean all is lost. You can still get relief, but you must enter what’s called an adversary proceeding. This is a term used in bankruptcy law that essentially means that we are bringing a new lawsuit on your behalf. In this proceeding, the aim is to prove that your student loans are causing undue hardship.
Undue hardship can be a hard thing to define. What the lending institution might see as an appropriate sacrifice might actually be a debilitating hardship for you. It’s up to your student debt lawyer to help you show otherwise. And courts have developed some consistent criteria on the factors they’ll consider.
The Brunner Test: This goes back to a 1987 court case, Brunner v. New York State Education Services. Marie Brunner sought to get her student loans wiped away less than a year after getting her master’s degree. That didn’t work for her, but the case allowed courts to develop a three-step process for the future. Brunner guidelines consider poverty, persistence, and good faith.
Poverty might be a harsh term that doesn’t really define where you are, but it is what the courts will call it if your current income doesn’t match your current expenses. Persistence indicates that the difficult financial situation is more likely than not to continue. Good faith demonstrates that you’ve done the best you can to pay off the loan.
Courts that do not use Brunner criteria may instead use the Totality of Circumstances test. This is not substantially different from Brunner in that it considers your financial resources and living expenses. The final criteria are “other relevant facts and circumstances,” a vagueness of language that can either work for you or against you depending on how well your case is presented.
There are a lot of myths floating around about the bankruptcy process, including one that says hardship relief is almost impossible to come by. It’s why less than 1 percent of people who file for Chapter 7 even bother to try the adversary proceeding process. But the myth is completely unsupported by data. A study has shown that 40 percent of those who applied for hardship were able to get at least partial relief for their student loans.
So, the myth is not only wrong, but also financially damaging if it scares anyone off. A bankruptcy court that decides hardship applies may, at minimum, give you a payment plan with lower interest rates. They might reduce the overall value of the loan. Or they might discharge the entire debt.
A Chapter 13 bankruptcy filing is less drastic than a Chapter 7. In the latter, the applicant is seeking to eliminate all unsecured debts. A Chapter 13 plan is aimed at crafting a viable payment plan for the debts, with the possibility of forgiving any unsecured debt that still exists at the end of the process.
Student loans still remain a protected class of unsecured debt, so they can’t be eliminated. But there is the possibility of getting reduced payments for the length of the plan, which is often at least three years and as many as five years. This makes sense for people who have a reasonable hope of better financial prospects by the time the bankruptcy plan comes to an end.
In an approved Chapter 13 bankruptcy plan, you make a single payment to a designated trustee. That trustee will then distribute the money among your creditors. At the end of the plan, your lender will then issue a new payment plan based on the balance.
Depending on the circumstances, it’s possible that Chapter 13 might not make a significant dent in your student loan debt per se. The trustee will give priority to other debts–credit cards, hospital bills, etc. –because they will be wiped clean at the end of the plan. But, with that other unsecured debt being dismissed, you may be in a much better position to resume making what had been the standard monthly payments before bankruptcy.
For those in need of immediate relief, who are being hounded by student loan debt collectors, Chapter 13 offers another advantage–the filing places an immediate stay on all debt collection. Of course, it won’t make the loan go away, but it can be a lot easier to think through your options with your attorney if you aren’t besieged with collection calls and letters.
When you reach the point where your student loan debt has become debilitating, you may choose to consider other options. If your creditor is the federal government, you may qualify for a loan forgiveness program, or a restructured payment plan based on your current income.
Those who have suffered a disability since leaving college might find relief on that basis. Forbearance and deferment are programs that allow a temporary pause to be put on payments. These plans have specific eligibility requirements but are worth exploring.
A lot of people are in very tough financial situations, not through their own fault, but through a system of financing college costs that has left them needing some help and some legal guidance. Sarah has been in practice for 17 years and her work is focused exclusively on consumers dealing with financial challenges. Sarah understands the problems and will work with you towards a solution.