Understanding Bankruptcy and Discharging Student Loan Debt
Certainly, a student facing debt can declare bankruptcy. This article will provide a detailed walkthrough on the feasibility of discharging student loan debt in the bankruptcy process.
Feasibility to Discharge Student Loan Debt in Bankruptcy
While it is technically possible to relieve student loans through a bankruptcy proceeding, it is a challenging procedure. Discharging student loan debts is not as simple as other forms of consumer debt. Only a fraction of filers manage to get their student loans discharged, highlighting the difficulties involved.
According to a specific report, just 0.1% of student loan holders filing for bankruptcy attempt to get their loans discharged, and even fewer—0.04%—are successful. The primary criteria for relieving student loans in a bankruptcy filing is establishing undue hardship, but proving this can be extremely difficult.
Under existing statutes, student loans typically cannot be discharged in bankruptcy except under specific cases where the borrower’s obligations cause 'undue hardship.' This means the borrower, or the borrower’s obligations, must be considered to cause extreme financial strain.
How to Pursue Student Loan Discharge in Bankruptcy Proceedings
The path to discharging student loans in bankruptcy is arduous. For instance, achieving undue hardship is a significant hurdle. It may be worthwhile to consult with a bankruptcy attorney to explore your case. However, examples of undue hardship include permanent injury, terminal illnesses, or substantial financial distress.
Even if you meet the criteria for undue hardship, successfully pursuing discharge involves additional work beyond the standard bankruptcy process. You must present your case effectively and provide substantial evidence. This includes gathering documentation of your efforts to make good-faith attempts to pay.
During the adversary proceeding, you will need to demonstrate various aspects of your financial situation, including your income budget, debt load, and any attempts to restructure your loan payments. It is crucial to be thorough in documenting these details.
Preparing for the Adversary Proceeding
When seeking to discharge student loans, the court considers several factors, including your history of good-faith repayment and efforts to modify your payment plan. Documenting these efforts can significantly impact your case.
For instance, if you are facing financial difficulties and cannot afford your loan payments, contacting your loan servicer for alternative payment options can be beneficial. Keep records of all communication and any changes you make to your payment plan. These records might serve as evidence in the adversary proceeding.
Expected Outcomes of Student Loan Discharge in Bankruptcy
Three potential outcomes exist:
Complete Discharge: The court may decide to entirely forgive the debt, making further payments unnecessary. Partial Discharge: A portion of the debt may be forgiven, but you may still be responsible for the remainder. The court might rule that you should continue paying federal loans under an alternative payment plan, while private loans are discharged. No Discharge: You may be required to pay the full balance of the loan. However, if making a payment would render repayment financially viable, the court might amend other aspects of your loan, such as your interest rate.It is essential to note that the likelihood of a full or partial discharge is extremely low, as only a handful of individuals in 2011 obtained a waiver of student loan repayment during bankruptcy.
Long-Term Consequences of Bankruptcy on Credit
The long-term repercussions of bankruptcy on your credit rating, even with a successful student loan discharge, remain significant. Bankruptcy stays on your credit report for up to 10 years, impacting your ability to obtain future credit and loans.
Considering these challenges, it is crucial to explore alternative debt management options before filing for bankruptcy. Options like income-driven repayment plans, loan deferment, or forbearance might offer more manageable relief without the complexities of bankruptcy.
Understanding the bankruptcy process and exhaustively investigating all possible alternatives can help you make an informed decision about the best course of action for managing your student loans.