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Student loans under Chapter 7 bankruptcy

On Behalf of | Dec 31, 2020 | Blog, Chapter 7 Bankruptcy

Consumers in Jackson, Mississippi, can file Chapter 7 bankruptcy to help them erase debts they can no longer manage to pay. Debtors commonly file bankruptcy to remove student loan debt. However, not all debts receive the same treatment under Chapter 7.

Basics of Chapter 7 Bankruptcy

The bankruptcy process begins by the debtor filing a petition with the court that determines if the debtor qualifies for Chapter 7. It involves a court-appointed trustee selling non-exempt assets to pay debts. Each state has its own rules for non-exempt assets, but it generally includes second homes, non-essential vehicles, heirlooms and valuable collections.

It also prioritizes secured debt, such as mortgages and auto loans, over non-secured debts. At the end of the bankruptcy case, the debtor receives a discharge from the court.

Removing Student Loan Debt Under Chapter 7

Older bankruptcy laws allowed the discharge of student debt until laws passed in 1978 and 2005 to prevent system abuse. It doesn’t mean that student loans can’t receive a discharge, but it requires extra steps until new legislation passes.

A debtor must file an adversary case separately from the bankruptcy case. This commonly involves the debtor or lawyer making a written complaint to the judge who decides the case. The debtor still may have to pay part or all of the debt.

Many courts use the Brunner Test to decide on erasing the debt. The debtor must prove that paying the loan would create an undue hardship that forces them to live below minimal standards. In addition, the debtor has to prove they do not foresee any improvement in the situation any time soon.

They must have made a good faith effort to pay the debt, which means without fraud and trying to negotiate with lenders. Paying the loan quickly with a cash advance could be considered fraud, especially if the debtor attempted to discharge the new loan. In most cases, dischargeable debts cannot be less than 90 days old, unless the lender committed fraud.

Debtors can file Chapter 7 bankruptcy themselves. Hiring a lawyer, however, can increase one’s chances of success.