Now that the COVID-19 pause on student loan payments has ended, loan holders who can’t make ends meet may be wondering: Can you file for bankruptcy on student loans?
The answer is that, traditionally, student loans cannot be forgiven as part of a bankruptcy filing, but you can get the same relief by filing an adversary proceeding and proving that repaying your student loan would cause you an undue hardship. The new process for seeking to discharge federal student loans in bankruptcy was initiated in November 2022, while few were making student loan payments.
While the bankruptcy judge makes the final decision whether to grant a discharge of your student loan debt, an experienced Orlando bankruptcy lawyer with Florida Law Advisers can help you with the necessary bankruptcy filings and the associated adversary proceeding in Central Florida. Contact us for a free consultation with an experienced Orlando bankruptcy attorney to learn more.
How Does Student Loan Bankruptcy Work?
To have your student loan discharged as part of a bankruptcy proceeding, you would first file for either Chapter 7 or Chapter 13 bankruptcy.
Under Chapter 7 bankruptcy, sometimes called personal bankruptcy, large portions of the individual’s debt are discharged, and other debts are paid by selling off assets. You must pass a means test to qualify to file a Chapter 7 bankruptcy.
Those who do not qualify to file under Chapter 7 may file a Chapter 13 reorganization bankruptcy, which discharges some debt but requires the individual to present a plan to pay other debt over three to five years.
A knowledgeable bankruptcy attorney with Florida Law Advisors can review your finances and help you determine your best option for regaining financial stability. We can help you gather the necessary information to develop your bankruptcy case.
Along with a bankruptcy filing, we can help you file an adversary proceeding to have your student loan debt considered for discharge.
What Circumstances Do I Need to Prove To Have My Student Loan Discharged in Bankruptcy
In bankruptcy court, an adversary proceeding is much like a lawsuit in other civil courts. It is a legal complaint against one or more defendants, which asks the court to grant the plaintiff a particular type of relief.
In this adversary proceeding, your bankruptcy attorney would file a complaint asserting that the federal government was causing you an undue hardship by requiring you to repay your student loans. The complaint would demand the discharge of the debt as part of your bankruptcy proceeding as proper relief.
Filing for Student Loan Bankruptcy
Under the new process, debtors must complete an attestation form to help the court assess the discharge request. The form asks for your household income and expenses, family size, and details such as previous efforts to repay the debt.
Justice Department attorneys, in consultation with the Department of Education, will review the complaint and attestation form. They are to state their support for the discharge of student debt in appropriate cases. Even when factors may not support a complete discharge, the Justice Department is to consider supporting a partial discharge if appropriate.
How Do Bankruptcy Courts Determine Undue Hardship?
Justice Department attorneys are to assess three factors when considering an undue hardship complaint:
- Present Ability to Pay – Using standards developed by the IRS and information from the attestation form, the Justice Department attorney is to calculate the debtor’s expenses and income. If a debtor’s expenses equal or exceed income, this establishes that the debtor lacks the present ability to pay.
- Future Ability to Pay – Next, U.S. attorneys assess whether the debtor’s present inability to pay is likely to persist. They are to presume the debtor’s financial circumstances are not likely to change if certain factors are present, such as retirement age, disability or chronic injury, protracted history of unemployment, lack of a college degree, or extended repayment status. If such factors do not exist, the attorney is to assess other facts presented in the debtor’s complaint to determine whether the present inability to pay is likely to persist.
- Good Faith Efforts – The Justice Department is to consider objective criteria that indicate the debtor’s reasonable efforts to earn income, manage expenses, and repay their student loans. For example, having contacted the Department of Education or their loan servicer to discuss payment options will be considered an act of good faith. A debtor will not be disqualified based on missing payments previously if other evidence of good faith exists.
The Justice Department, through local U.S. attorneys, will make their recommendations, but the Bankruptcy Court judge has the final say. As your attorneys, we would prepare your complaint and accompany you to court to answer questions about your hardship request or the government’s response to it. We would make your case for you and protect your legal rights.
In the end, the bankruptcy judge may rule that:
- Your student loan is fully discharged, meaning you will not have to repay any remaining portion of your loan. All collection activity will stop.
- Your loan is partially discharged, meaning you will still be required to repay some portion of your student loan.
- You are required to repay your loan but with modified terms, such as a lower interest rate.
Alternatives to Bankruptcy for Student Loans
If it is only the resumption of student loan payments that is making you consider bankruptcy, it may be that bankruptcy is not necessary. There are federal student loan repayment plans that can give you more time to repay your loans or tailor payments to your income.
With the assistance of your experienced bankruptcy attorney from Florida Law Advisers, you may be able to work out a debt settlement agreement with one or more of your creditors or a mortgage loan modification to ease your financial burdens.
The point is you will have dependable, experienced legal guidance if you are working with Florida Law Advisers, P.A. We can do a full assessment of your finances and the options available to you and help you take the steps necessary to move toward a financially sound future.
Contact Our Orlando Bankruptcy Attorneys
If your student loan obligations are causing you overwhelming financial problems, bankruptcy might allow you to discharge that burden and make a fresh start. Contact an experienced Florida Law Advisers bankruptcy attorney in Orlando for an assessment of your financial situation and the legal options available to you.
We are a full-service law firm serving clients in Orlando, Orange County, and throughout Central Florida. We will be there for you every step of the way, making sure you understand your rights. Contact us today for a free, no-obligation consultation.