Student loans generally are not dischargeable in bankruptcy, but bankruptcy may still be the right choice for a student loan borrower struggling to keep up with payments. Unless a debtor can prove “undue hardship,” a student loan – federal or private – will not be discharged. Prior to the bankruptcy law change in 2005, private student loans were treated differently than federal student loans; however, they are now treated the same under bankruptcy law. If you are considering bankruptcy and have student loan debt, an experienced Morris County bankruptcy attorney can explain how filing for Chapter 7 or Chapter 13 bankruptcy may benefit you.
The Hardship Discharge
After you file bankruptcy, you can initiate what is called an adversary proceeding to seek a hardship discharge of your student loans. An adversary case is filed in the same bankruptcy court where you filed your bankruptcy case. If you can demonstrate to the court that paying your student loans poses “an undue hardship on you and your dependents,” then the court may decide to discharge your student loan debt, meaning you are no longer liable for paying it. Some examples of hardship discharges that have been granted include:
- Cases where the borrower did not benefit from the education
- Cases where the borrower went to a fraudulent school
- Cases in which ongoing physical or mental impairment interferes with the borrower’s ability to work
A hardship discharge can be sought in a Chapter 7 or Chapter 13 case; however, the granting of hardship discharges varies by court to court and from case to case, and a hardship discharge can be very difficult to obtain. A qualified Morris County bankruptcy lawyer can determine whether you may be eligible for a hardship discharge and help you file the necessary paperwork to seek such a discharge of your student loan debt.
Chapter 13 Bankruptcy
Sometimes Chapter 13 bankruptcy helps borrowers get a handle on their student loan payments. In this chapter of bankruptcy, the debtor enters into a three to five year repayment plan in which secured and priority debts are paid in full and a certain percentage is paid to unsecured creditors, including student loans. When the Chapter 13 plan is complete, you will still be liable for whatever balance remains on your student loans, unless you obtain a hardship discharge. However, your secured and priority debt (car loans, taxes, mortgage arrears, etc.) will have been paid in full through the plan, and if you obtained a Chapter 13 discharge, you will no longer be liable for any unsecured debt that was discharged (credit cards, personal loans, certain income taxes, etc.). This should make it easier for you to manage your student loan payments after exiting bankruptcy.
Moreover, while the Chapter 13 case is pending, student loan lenders cannot continue collection actions against you, such as wage garnishment, and in most cases, you will not make student loan payments directly to the lender, instead making one affordable Chapter 13 plan payment to the bankruptcy trustee.
How the Automatic Stay Can Help
Whether you file Chapter 7 or Chapter 13 bankruptcy, in most cases, a stay automatically goes into effect that prevents creditors from taking certain collection actions. If your wages are being garnished because you defaulted on a student loan, the bankruptcy stay will halt the garnishment while the bankruptcy case is pending. The stay, therefore, may provide you temporary relief from the collection efforts of student loan lenders while you reorganize your debts under Chapter 13 or discharge your unsecured debt under Chapter 7.
If you are struggling financially, a knowledgeable Morris County bankruptcy attorney can provide you with important bankruptcy information, including how your student loans will (or will not) be affected by bankruptcy. Contact an experienced attorney today to learn how you can get the financial relief you deserve.