Bankruptcy

Bankruptcy | Student Loans and other Unforgivable Debts

It’s one of the most commonly asked student loan questions: Can you discharge your student loans in bankruptcy? The short answer: normally no, student loans are not dischargeable. Student loans are now the second highest consumer debt category – behind mortgages, but ahead of credit card debt. Unlike other consumer debt such as credit card and mortgage debt, however, student loans traditionally cannot be discharged in bankruptcy.

 

Why are student loans different?

The rationale for the student loan “no bankruptcy” exception likely grew from a concern that student loan borrowers could take advantage of bankruptcy laws, borrow a bunch of debt, earn a degree and then file for bankruptcy. In some circumstances, student loans can be discharged, but you have to file a separate lawsuit. This lawsuit must be filed with the bankruptcy court. To be successful at discharging your student loans, you must prove to a judge that being forced to repay your student loans poses what the U.S. Bankruptcy Code calls an “undue hardship.”

The courts of the Eighth Circuit (the circuit Arkansas is in), look at the debtor’s individual circumstances (they call it a totality of the circumstances test) to determine whether excluding student loans from discharge would impose an undue hardship on the debtor.  The test includes: “(1) the debtor’s past, present, and reasonably reliable future financial resources; (2) the debtor’s reasonable and necessary living expenses; and (3) any other relevant facts and circumstances.”

 

How do I deal with my student loans?

When dealing with student loans and bankruptcy there are a couple of things to think about. In Chapter 7, they will not likely get discharged and dealing with your student loans will remain the same. In Chapter 13, you may be able to file and make the majority of your payment go to student loans while your other creditors (maybe credit card and medical bills, do not get paid as much). Also, you may file be able to file Chapter 13 and pay your other creditors (house and car) and push your student loans for another 5 years.

 

How to deal with Student Loans outside of bankruptcy?

Your best option is probably one of the following income-based repayment options:

  1. Revised Pay As You Earn Repayment Plan (REPAYE Plan)
  2. Pay As You Earn Repayment Plan (PAYE Plan)
  3. Income-Based Repayment Plan (IBR Plan)
  4. Income-Contingent Repayment Plan (ICR Plan)

Sometimes you can get a payment of $0.00 per month in an income-based repayment program.

 

Debts That Are Not Discharged in Bankruptcy:

Some debts are never discharged in bankruptcy. Some are not discharged unless you can successfully argue that they should be. Some are not discharged if a creditor successfully argues that they should not be.  

 

Debts That Are Never Discharged:

You will continue to owe these debts after your bankruptcy case is over:

  • child support and alimony;
  • fines, penalties, and restitution you owe for breaking the law;
  • certain tax debts; and
  • debts arising out of someone’s death or injury as a result of your intoxicated driving.

If you file under Chapter 7, you will also continue to owe condo, co-op, and HOA fees; debts for loans from a retirement plan; and debts you couldn’t discharge under a previous bankruptcy.

 

Debts That Are Not Discharged Unless You Prove an Exception Applies:

Certain debts will be discharged only if you ask the court to rule that it should be. In other words, the default is that these debts are not discharged unless you convince the court otherwise. These are:

  • student loans; and
  • regular income tax debt.

 

Debts That Are Discharged Unless A Creditor Successfully Objects

Some debts are discharged unless a creditor comes forward and convinces the court that they should not be. These debts include:

  • debts arising from your fraud (purchasing items with no intent to pay it back, i.e. using your credit card right before you file). This includes recent debts for luxuries (items not needed for support or maintenance or you or your dependents) of more than $675 (as of April 2016 – changing April 2019) or cash advances of more than $950 (as of April 2016 – changing April 2019) within a certain period of time before you file;
  • debts arising from your willful and malicious acts;
  • debts arising from your embezzlement, larceny, or breach of fiduciary duty; and  
  • debts or creditors you don’t list on your bankruptcy papers.  

If this is a little confusing, feel free to call, 501.372.1212, or set up a free consultation by clicking here.

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