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Bankruptcy and Student Loans

Law Office of Jason Cline  Jan. 20, 2023

Man counting college savings fund, tuition fee or student loan with calculator.In the United States, individuals who are overburdened with debts may be eligible to seek financial relief by filing for bankruptcy. However, student loan debts are treated in a different way in bankruptcy compared to other forms of consumer debt. An experienced New Mexico bankruptcy attorney can help you understand whether filing for bankruptcy will discharge your student loans. 

At the Law Office of Jason Cline, I’m committed to offering knowledgeable guidance and advocacy to clients in the legal matters of bankruptcy and student loan debts. I can evaluate your unique situation and enlighten you about your eligibility for student loan discharge when you file for bankruptcy. My firm is proud to serve clients across Albuquerque, Los Lunas, Santa Fe, Rio Rancho, or anywhere throughout the state of New Mexico. 

How Does Student Loan Discharge Differ From Regular Bankruptcy?  

Many consumers often find it extremely difficult to pay off their student loan debts. Generally, student loans are not automatically discharged in bankruptcy. However, depending on the bankruptcy chapter you’re filing for and other surrounding circumstances, you may be able to wipe all or part of your student loan debts clean. 

Chapter 7 Bankruptcy and Student Loans 

Chapter 7 bankruptcy is designed to help consumers eliminate most of their general unsecured debts, such as medical bills, credit cards, and personal loans, and achieve a financial fresh start. A court-appointed trustee will gather and sell your non-exempt assets, then pay your creditors using the net proceeds from the sale. 

As previously mentioned, there’s no automatic discharge for student loan debts. To be considered for student loan discharge, you must file a petition to initiate an adversary proceeding. This is a separate lawsuit within your bankruptcy case, which allows you to prove to the judge that repaying your student loans can put you in “undue hardship.” Hence, they should be wiped clean. 

Chapter 13 Bankruptcy and Student Loans 

Chapter 13 bankruptcy is available to regular income earners who are overburdened with debts. In Chapter 13, you will propose a repayment plan – structured over three to five years – to settle your debts, including student loans, using your future income. 

Fortunately, student loan debts are treated as non-priority unsecured debts in Chapter 13. Hence, you don’t have to pay off all your student loans through your repayment plan. However, interest may mount on the student loan during the repayment period. If your student loans fall into the dischargeable debts category, they may be discharged at the end of your Chapter 13 repayment plan. 

Grounds for Student Loan Discharge  

It is a common misconception that student loans cannot be discharged in bankruptcy. Here are some grounds for student loan discharge: 

Undue Hardship 

To be eligible for student loan discharge through bankruptcy, you must show that you will face undue hardship by repaying them. To determine undue hardship based on the new guidelines, the judge will: 

  • Assess your current ability to pay the student loan debt 

  • Evaluate your future ability to pay the student loan debt 

  • Evaluate whether you made considerable efforts to improve your financial situation and repay the debt 

  • Evaluate the value of your assets, property, savings, and household income 

The Brunner Test 

In the Brunner Test, that judge will grant a student loan discharge only if the answers to these three questions are “yes”: 

  • Are you unable to maintain a minimal standard of living while repaying your student loans based on your current income and expenses? 

  • Is your financial situation likely to persist? 

  • Have you made a good-faith effort to repay the student loans? 

The Totality of Circumstances Test 

In the totality-of-the-circumstances test, the judge will evaluate all of the relevant facts and circumstances to determine whether to grant your request for student loan discharge. 

An experienced attorney can enlighten you about the consequences of ignoring your loans and determine whether you qualify for student loan discharge through bankruptcy. 

Consequences for Ignoring Your Loans  

Here are some possible consequences of defaulting or ignoring your loans: 

  • Lower or bad credit score 

  • Late fees, fines, and penalties 

  • Wage garnishment 

  • Negative impact on your credit report 

  • Difficulty in obtaining loans 

  • Social Security payments garnished 

  • The cosigner will become involved 

Rather than defaulting or ignoring your loans, you should consider your available options to seek debt relief, including bankruptcy. A seasoned lawyer can enlighten you about the benefits and drawbacks of filing for bankruptcy when overwhelmed with student loan debts and explore your eligibility for discharge. 

Understand How Your Student Loans Apply to Your Individual Bankruptcy Case  

In a bankruptcy case, student loan debts are treated differently from other unsecured debts. Regardless, your student loans may still be eligible for discharge by showing that paying off the decade-long loan may put you in “undue hardship.” At the Law Office of Jason Cline, I’m dedicated to guiding clients through the complexities involved in filing for bankruptcy and seeking student loan discharge. 

As your attorney, I can explore your available options and determine whether filing for Chapter 7 or Chapter 13 may be right to eliminate your student loan debts. Also, I will help file your bankruptcy petition, represent you intelligently in every phase of the legal process, and help you achieve the financial relief or clean slate that you deserve. 

Contact me at the Law Office of Jason Cline today to schedule a one-on-one consultation with a trusted bankruptcy lawyer. I can provide the experienced legal counsel and brilliant advocacy you need to navigate crucial decisions in your bankruptcy case. My firm proudly serves clients across Albuquerque, Los Lunas, Santa Fe, and Rio Rancho, New Mexico.