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How bankruptcy handles student loans

| Mar 8, 2021 | Bankruptcy, Blog, Chapter 7 Bankruptcy

Bankruptcy in Jackson, Mississippi, can eliminate most debts but not all of them. It only erases exempt, nonsecured debts, such as medical bills and credit card bills. One myth that still circulates is that student debt cannot be removed in bankruptcy. New proposed legislation will make eliminating student loan debt easier, but until then, there are special considerations.

How student debt bankruptcy works

Debtors who have few assets and a lower income may benefit from Chapter 7 bankruptcy. This type of bankruptcy requires the selling of nonexempt assets through a trustee to pay creditors. Filers with sufficient income rarely qualify for Chapter 7 and could have to switch to Chapter 13.

Chapter 13 reorganizes debts into a court-approved structured payment plan the debtor devises him or herself. An individual does not have to sell assets as long as he or she maintains payments.

However, debtors cannot file a bankruptcy petition for one debt, and the Department of Education may think the debtor intends to avoid paying the loan. The debtor also must file a separate proceeding called an adversary proceeding.

Undue hardship

The court may consider removing some or all a person’s debt if he or she can prove an undue hardship. Some courts commonly use the totality of circumstance method to determine a hardship, which considers all facts of the case, the debtor’s future and living expenses.

The court could apply the Brunner test, which requires debtors to satisfy three factors. The filer must show that paying the debt could cause him or her to fall below the poverty level. Two other factors include a person not foreseeing a change during the repayment period, and he or she has made a good faith effort to repay the debt. Even if the court denies a complete discharge, the debtor may get lower interest rates.

Chapter 7 bankruptcy provides the quickest relief, but it can impact a person’s credit scores for 10 years, which makes getting loans harder. A debtor should discuss his or her circumstance with an attorney who may advise him or her about other solutions.