Student Loan Bankruptcy Is Possible

26 October 2017

Any Columbus bankruptcy attorney will tell you that having student loan debt forgiven is incredibly difficult. People who can file a petition for Chapter 7 bankruptcy because they have little or no income and few assets have the best chance for getting their student loan debt reduced or restructured, with the keyword being “chance.”

Individuals who file a Chapter 13 Bankruptcy have a difficult time discharging their student loan obligations, because in most situations, they have a higher income than people who file a Chapter 7. One potential benefit of filing a Chapter 13 bankruptcy would be to stop a garnishment for student loans, and set up a reduced payment plan.

Working with an experienced and dedicated Columbus student loan bankruptcy lawyer will increase the likelihood of receiving a reprieve from crushing payments. 


A Separate Filing

Student loan debts cannot be dischagred in a Chapter 13 or Chapter 7 bankruptcy filing. A person who needs to have payments on educational debts must go through the standard federal bankruptcy process and then file a separate Complaint to Determine Dischargeability.

Like the Chapter 13 or Chapter 7 process, the student loan discharge petition goes to the federal district court closest to the person seeking relief. Also like the earlier process, the petitioner must submit information on income, investments, taxes, and outstanding loan balances.


A Court Case

Filing a Complaint to Determine Dischargeability starts an adversarial legal proceeding. This means that the bank, agency, or loan servicing corporation that holds each loan can contest the petition for debt relief and question the petitioner’s need for debt forgiveness.

The court handling the case will ask the petitioner for proof that continuing to make payments on the listed student loans will create or worsen his or her financial hardship. Specifically, and as listed on the U.S, Department of Education’s webpage regarding what it calls “discharge in bankruptcy,” the court applies a three-part test to see:

  • Whether the petitioner would be able to maintain a minimal standard of living if forced to repay the loan under present terms;
  • Whether the financial hardship will continue for a significant portion of the loan repayment period; and
  • Whether the petitioner made good faith efforts to repay the loans before filing bankruptcy.

Courts are most inclined to rule in favor of a petitioner who has no current income, few job prospects, and one or more loans for courses offered by a for-profit college.

A person seeking student loan relief should also ask his or her bankruptcy attorney to demand all the original and updated paperwork on the debt. Banks and loan servicers often sell accounts, but the necessary documentation does not always transfer from one institution to the other. When a creditor cannot produce proof that a debt is owed, a court may declare it uncollectable, which is the equivalent of having the outstanding balance forgiven in full.


Possible Outcomes

If a bankruptcy judge rules that a person deserves hardship relief from student loan payments, he or she can order one of several remedies, including

  • Telling the bank, agency, or loan servicer to stop collections,
  • Asking both parties to negotiate lower payments over an extended period,
  • Reducing the principal, or
  • Suspending payments for a set period.

A Calig Law Firm bankruptcy attorney is available for a free and confidential student loan bankruptcy consultation. Appointments can be made online or scheduled by calling (614) 252-2300.


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