As much as student loans help eliminate financial challenges when pursuing an educational degree, it may be frustrating to pay them. San Diego Bankruptcy Attorney assists clients to discharge their student loan debts in bankruptcy. We have helped San Diego, CA, residents with bankruptcy issues such as wage garnishment, vehicle repossession and lawsuits among others. Explained below are responses to some of the concerns of our clients regarding student loans and bankruptcy.
The Student Loan Debt Situation in California
A recent survey ranked the State of California in first place regarding student loans debts in the country. 3.7 million borrowers out of the 44 million borrowers in the country come from California. These numbers reveal how severe the student loan debt crisis is becoming in the state. It’s not a surprise that more people are resolving to bankruptcy for them to get these debts discharged.
What Procedure Can You Follow When Discharging a Student Loan In Bankruptcy?
To have your student loan debt wiped out in bankruptcy, you first have to file an adversary proceeding through your lawyer. An adversary proceeding is basically a type of lawsuit related to a bankruptcy case. Bankruptcy cases usually follow the structure of an administrative proceeding, which make it possible for you to receive a requested benefit once you meet specific requirements.
As the filer (debtor), you’ll be looking to wipe out (discharge) your student loan debts while the creditor will be expecting you to pay what you owe. If there's no dispute between you (the debtor) and your creditor, expect your bankruptcy case to move along smoothly. A California court will appoint a bankruptcy trustee to administer your case and ensure that your creditors are paid if you have assets that can do so. Your case will only be resolved through an adversary proceeding if there’s a dispute between you and the creditor.
How to Have a Student Loan Debt Wiped Out in Bankruptcy
Though people doubt whether filing for bankruptcy can help wipe out student loan debts, the truth is that there’s an exception for doing so. The “undue hardship” exception was introduced to help discharge a student loan debt if you’re experiencing financial hurdles. However, you’ll have to prove to a court of law that you’re incapable of making the repayments now and in the future.
Courts in California make it a necessity for you to pass the Brunner Test before discharging a student loan debt. They may also allow your debt to be eliminated if you prove that you’re suffering a permanent and severe disability, which prevents you from generating income. The three conditions for you to meet in the Brunner Test are as follows:
- You can’t maintain a minimum living standard for yourself or your immediate dependents judging on your present income and associated expenses
- Your current situation is likely to persist for a long time
- You made an effort, in good faith, to repay your student loan debt in the past
A California court may use the Totality of the Circumstances Test as an alternative to the Brunner Test. In this test, the court will consider all relevant factors surrounding your situation. The goal here is to establish whether you’re experiencing any hardships when repaying your outstanding student loan debt.
How Can You Manage Student Loans With Bankruptcy?
One of the best options for managing high payments for your student loan debt is to use bankruptcy. Such a strategy may come handy if you’re unable to discharge the debt. Luckily, filing for Chapter 7 bankruptcy or Chapter 13 bankruptcy makes it easier to manage the debt as discussed below:
Chapter 7 Bankruptcy
A Chapter 7 bankruptcy enables you to have part or all of your student loan debt canceled. Also referred to liquidation bankruptcy, Chapter 7 bankruptcy gives you an option of selling (liquidating) some of your property to settle a debt. Your record must indicate that you haven't made any bankruptcy discharge in the past (a six to eight-year period) to be eligible. You'll also need to fill forms detailing your property, debts, income, and expenses among others.
Pre-filing debts are the only debts that are dischargeable in Chapter 7 bankruptcy. A pre-filing debt is a financial obligation you incurred before the day you filed for bankruptcy. The debt may include medical debt, student loan debts, personal loans, and credit card debts. You’re responsible for paying your post-filing debts, which include the bills racked up once you submit your bankruptcy paperwork.
Chapter 13 Bankruptcy
A Chapter 13 bankruptcy allows for affordable payments to minimize your student loan debts. You may also use a Chapter 13 case to have other debts discharged to allow you to spare more funds for making student loan payments. You'll get to follow a repayment plan lasting from three to five years.
As you file for a Chapter 13 bankruptcy, you're obligated not to pay off any unsecured debt over a repayment plan ranging from three to five years. Filing for this case allows your disposable income to be divided among your remaining creditors. Disposable income is basically the amount of money left over after paying your expenses (necessary and reasonable ones) and certain payments (such as child support and taxes). Once your plan period is over, you'll have most of your unpaid unsecured debts discharged.
Example
Mark currently has a student loan debt totaling to $75,000 and unsecured debt totaling to $25,000 as he plans to file a Chapter 13 bankruptcy. He adopts a plan for paying his disposable income ($430) every month for sixty months. Since his student loan debt accounts for 75 percent of his total debts, Mark will be paying $300 to the student loan creditor every month. He will also expect all of his remaining unsecured debts to be forgiven while settling the remaining student loan balance.
Can You Discharge Cosigned Student Loans in Bankruptcy?
As a cosigner on someone else’s student loan, it’s possible to wipe out your obligation to repay the alleged loan. You can only do this after meeting the undue hardship standard that California courts follow when hearing bankruptcy cases. A cosigner can be a relative/non-relative, spouse or parent of the student loan borrower.
Student loan cosigners are subject to the same discharge standard that applies to the loan borrowers. Courts usually prove undue hardship for repaying a loan using the Brunner Test. They may approve you for a student loan discharge if your income can't allow you to make the payments.
Does Bankruptcy Stop Creditors From Collecting Student Loans?
Student Loan Servicers and other debt collection agencies are prohibited from collecting loan payments from you at the course of your bankruptcy case. Note that this restriction only applies as long as the bankruptcy case is active If the court denies your suit, the creditor and other debt collection agencies will resume collecting your student loans.
Filing for bankruptcy makes it possible for the automatic stay to take effect. The automatic stay, on the other hand, prohibits your creditors from pursuing any collection efforts when your bankruptcy case is ongoing. Such a tool also takes effect whether it’s clear that you won’t have your student loan debts discharged at the end of the bankruptcy case. Debt collection efforts, in this case, may include filing lawsuits for defaulting payments or instituting wage garnishments.
Can You Discharge a PLUS Loan in Bankruptcy?
Discharging a PLUS loan in bankruptcy is possible just like making other student loan discharges, which require you to prove undue hardship. Most parents acquire PLUS loans to finance the education of their children. Graduate students can also take out a PLUS loan on their own while undergraduate students who are still dependent on their parents can have their parents acquire them. If you take a PLUS loan for your child, you’ll be the sole obligor, which means that you’ll owe the PLUS provider student loan debt.
A California court won’t consider the fact that you didn’t benefit from the education paid by a PLUS loan. However, the court will ask you to show ways on how repaying the loan would impose a burden on you. The older you are, the more likely for you to pass the Brunner Test since you’ll have a short time to pay the loan debt before retiring.
Through your lawyer's assistance, you'll need to file a separate complaint to determine whether the PLUS loan is dischargeable. You'll also use the claim to ask a judge to rule in your favor. The case may go through a discovery process or make it necessary for evidence or witness to be presented in court. Though it's common for PLUS loan creditors to oppose your complaint, your lawyer can win your case with appropriate legal defenses.
Defaulted Student Loans and College Transcripts
Some higher learning institutions assist student loan creditors in their collection efforts by denying a previous student access to college transcripts. While such a strategy you may deem such an approach as unfair, it helps prevent debtors from defaulting their loans. So, how can bankruptcy give you relief from such a situation?
Filing for bankruptcy may help you if you’re battling student loan debts and you’re denied access to your college transcripts. Your bankruptcy case may make it necessary for your school to release your college transcripts. Once the case is filed, an automatic stay takes effect preventing creditors from using any means to collect the money owed. You also get to wipe out the student loan debts provided that you meet the undue hardship standard.
How Long Will You Have to Collect Your College Transcripts?
Since the automatic stay won't last forever, your school may withhold your transcripts again. As long as the automatic stay is in effect, you should collect the transcripts from your school. Instances that prevent the automatic stay from remaining in effect are as follows:
- The court dismissing your bankruptcy
- Receiving a bankruptcy discharge
- The lender filing and winning a motion to prevent the automatic stay from being effective
You’ll only have three to four months to get your transcripts after filing for a Chapter 7 bankruptcy. On the other hand, a Chapter 13 case will give you more time to collect the transcripts. The case allows you to make loan repayments in a three to five-year period before the debt is discharged.
What Alternatives to Bankruptcy Can You Use to Clear Student Loans?
If bankruptcy fails to match your financial circumstances or goals, you may consider certain alternatives. Keep in mind that such options have their pros and cons depending on the amount of student loan debt you owe. They are as follows:
Income-Based Repayment Programs
You may rely on an income-based repayment program to make your loan repayments smoother and more affordable and have the debt forgiven after 20 years. Such a plan takes into account your income to assess the amount of money you'll be paying. To be eligible, you need to demonstrate your need to make the income-driven payments. Debt-to-income checks will be used to evaluate whether you'll have a reduction in your payment amounts when using the program.
Applying for an income-driven repayment plan may enable you to make lower monthly payments for your student loan debt based on your income. The different income-driven plans you can use include the income-contingent repayment plan and pay as you earn repayment plan. Others include the revised pay as you earn repayment plan and the income-based repayment plan.
Debt Counseling
You may sign up for a debt management program administered by a debt counseling agency if filing for bankruptcy doesn't help you discharge a student loan. Through the agency's help, you'll manage to create a plan for paying back your creditors. Unlike a Chapter 13 bankruptcy plan, you won't have any bankruptcy filing on your credit record when following this plan.
The downside is that if you miss a payment, the creditors will enforce collection actions since the program offers no protection for such actions. You’ll also be required to make the debt repayments in full unlike in Chapter 13 bankruptcy where you only pay a small fraction of the debt. Keep in mind that most debt counseling providers only care about collecting fees for their services rather than helping you get out of a debt situation.
Negotiating With Your Student Loan Creditors
Negotiations between you and the loan creditor may work if you have assets you’re ready to sell or adequate income. Instead of filing for bankruptcy, you may ask the creditors to give you some time to be financially stable. The negotiations can also involve agreeing to settle the debts for a lesser amount than you owe.
Stopping Harassment From the Creditors
In California, there’s a law (the California Fair Debt Collection Practices Act) that prohibits creditors and collectors from harassing you when you owe them a debt. If you’re more worried about creditors harassing you than going bankrupt, you may tell them to stop. You can document the violation if they violate this law and sue them for damages in a small claims court. Filing a complaint with the FTC (Federal Trade Commission) can also help prevent them from harassing you.
When is a Lawyer’s Help Crucial in a Student Loan Situation?
Once you decide to have any type of debt wiped out in bankruptcy, you'll need to consult a lawyer throughout the process. Apart from getting legal help on your bankruptcy, the attorney can help you in fight lawsuits, and address defaulted loans. Here are the aspects of your student loan situation in which the legal assistance will come handy:
Collections and Lawsuits
You need to speak with a bankruptcy attorney if you’re being sued by your creditor. The attorney can help you explore options for throwing away the case. You can also seek legal help in case a court order allows the debt collector to deduct a portion of your income to repay the student loan debt.
Defaulted Student Loans
A debt collection agency may take action on you for failing to make loan payments in about nine months. When this period elapses, the lender may assume that you refused to repay the loan debt. A bankruptcy lawyer can advise you on courses of action to take to avoid lawsuits or forced collections.
Bankruptcy Filing
A bankruptcy lawyer can prove that you’re unable to repay a student loan debt in court on your behalf. The legal counsel can also take you through the processes for filing a Chapter 7 and a Chapter 13 bankruptcy. With such help, you may increase your chances of negotiating a short repayment plan with the creditor or discharging the loan entirely.
Seek Help on Discharging Your Student Loan Debt From a Bankruptcy Lawyer Near Me
A bankruptcy attorney is your best option for relieving yourself from the pressure exerted by student loan creditors or debt collectors. San Diego Bankruptcy Attorney operates with a mission of making bankruptcy-related cases less frustrating to resolve. We pride ourselves for helping San Diego, CA residents access legal help on such cases swiftly and conveniently. Speak to one of our San Diego bankruptcy lawyers today at 619-488-6168, detailing your current situation for prompt assistance.
