Bankruptcies in general

There are, generally, two types of bankruptcies that someone may file. A Chapter 7 bankruptcy is where someone seeks a discharge of all of their debts. In a Chapter 7, virtually all of a person’s debts are discharged and the consumer is allowed to keep certain property that is exempt from creditors. Non-exempt property may need to be sold and the proceeds distributed to creditors.

A Chapter 13 bankruptcy is where a person has regular income and seeks to repay a portion of their debts. In a Chapter 13 bankruptcy, the court approves a repayment plan that usually lasts between 3-5 years. At the conclusion of the plan, all unpaid and unsecured debts are discharged.

One major benefit to either type of bankruptcy is the “Automatic Stay.” This is a court order that directs all debt collectors to immediately cease and desist from any further collection activity while you are in bankruptcy. There are severe sanctions for creditors and collectors who violate the Automatic Stay.

Bankruptcy and Student Loans

While both a Chapter 7 and a Chapter 13 bankruptcy typically eliminate all unsecured debt, Congress has carved out an exception for Student loans. Student loans, also called Educational loans can only be discharged upon a finding by a court that repayment of the debt “will impose an undue hardship on the debtor and the debtor’s dependents.” 11 U.S.C. 523(a)(8). Meeting this standard to include your student loan in a bankruptcy is difficult, but not impossible.

What is a Student Loan?

This is generally a loan that has been incurred for “qualified higher educational expenses.” Under the section 523(A) and (B) of the Bankruptcy Code, these loans are defined as:

  • (A)(i) an educational benefit overpayment or loan made, insured or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or non profit institution; or
    (ii) an obligation to repay funds received as an educational benefit, scholarship or stipend; or
  • (B) any other education al loan that is a qualified educational loan as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual;

What types of Student Loans are excepted from discharge?

The Bankruptcy Code excepts from discharge, loans for secondary and post secondary education (meaning high school, college and graduate school). Moreover, private and governmental student loans are also generally excepted from a bankruptcy discharge.

How do I go about getting my student loan discharged if I file bankruptcy.

After a consumer files bankruptcy, he has to file a lawsuit in the bankruptcy court called an Adversary Action. Essentially, the consumer sues the creditor in order to have the bankruptcy court declare the student loan to be dischargable. Sometimes, when a creditor believes that a question will arise as to whether its debt is a student loan, the creditor may file an adversary action to get a court determination on this issue.

Once an adversary action is filed, the creditor must, by a preponderance of the evidence, show that the debt is a student loan. Once the creditor meets this burden, its then up to the consumer to show that nondischargability of the loan would present an undue hardship on him.

There is no statutory definition of “undue hardship.” Generally, it means the consumer’s present income is inadequate to pay the loan and this situation is not likely to change even after considering the consumer’s future earning potential. Some courts have applied a three prong test to determine undue hardship as follows:

  1. The consumer cannot maintain, based on current income and expenses, a minimal standard of living for the debtor and consumer’s dependants if forced to repay the student loan;
  2. Additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and
  3. The debtor has made good faith efforts to repay the loans.

After reviewing these prongs in terms of a consumer’s bankruptcy, a court may find that only part, if not all of a consumer’s bankruptcy loans, may be discharged.

If you have been harassed by a debt collector, please call or email Attorney Gary Nitzkin at (888) 293-2882 for a free consultation. We will advise you of your rights and options.