What you need to know about student loans and bankruptcy
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You may have heard that it’s pretty much impossible to discharge student loan debt through bankruptcy. That’s not true. It’s not automatic, and it takes some extra work, but if you meet certain requirements, you might qualify for bankruptcy relief of some (or all) of your student loan debt. The reason so few people discharge college debt in bankruptcy is that so few even try.
That’s like complaining that you didn’t finish a race that you never started. The fact is, less than 1% of bankruptcy filers request student loan debt relief. But the interesting thing is that of the nearly 40% of those that do try either get partial or total relief from their student loan debt. It takes a little more effort but can be well worth it to pursue as part of your North Carolina bankruptcy.
Getting a discharge of student loans
If you’ve tried other options to cope with your student loan burden to no effect, bankruptcy may be a next step to consider. The primary obstacle to student loan discharge in bankruptcy is proving “undue hardship” to the bankruptcy court. Federal law says that student loans can be forgiven in bankruptcy if repayment of the debt poses an undue hardship on the debtor.
Then the law goes silent on what that means. That has left interpretation up to the courts. Most courts use the Brunner test based on a case of the same name. Under this test, the factors that the court considers include:
- Whether the debtor can maintain a reasonable standard of living given their income and costs of living should they be forced to pay the debt.
- Whether the debtor has any mitigating issues that will continue throughout most of the repayment term such as chronic illness, unemployment, low earning potential, etc.
- Whether the debtor has made efforts, in good faith, to repay the loans.
Not all courts use the same yardstick
Courts in different jurisdictions develop their own patterns of interpretation of the law. Not only that, but courts can overturn prior modes of thought and change the rule of “judge-made” law. This is happening in some jurisdictions with student loan debt. Also, private student loans are generally easier to get discharged than federal student loans.
Statutes of limitation
Whereas federal student debt has no statute of limitations, private loans are like any other form of consumer debt. In North Carolina, the statute of limitations is three years for most consumer debt. The statute begins tolling (i.e., the clock is ticking) the moment you miss a payment on that debt.
If you don’t make any more payments, after three years from the date of your missed payment, the debt is no longer legally enforceable for private student loans, credit cards, medical bills, and some other types of unsecured debts (but not federal student loans).
However, if you ever make a payment after it goes delinquent, even a few bucks, the clock resets. Creditors know this and when the statute of limitations is about to expire, may push hard to get you to send them even a small payment to reset the clock and keep you in debt.
Chapter 13 may help too
For those behind on student loans that can’t prove undue hardship, you can file Chapter 13 bankruptcy instead. This lets you catch up on past-due obligations, including federal student loans, while still getting relief on other unsecured debts.
Also, be sure to explore income-driven federal student loan repayment options which can let you pay no more than 10% of your disposable income no matter how substantial your loan balances. After 20-25 years of payments under the plan, remaining balances can be discharged.
To find out more about student loan debt relief in bankruptcy, contact the Law Offices of John T. Orcutt. Read reviews from satisfied clients then call +1-919-646-2654 to schedule a free bankruptcy consultation. We’ve got an office convenient to you in Raleigh, Durham, Fayetteville, Wilson, Greensboro, Garner or Wilmington.