How student loan debt gets handled in bankruptcy

On Behalf of | Dec 24, 2020 | Chapter 7 Bankruptcy |

Student loan debt commonly tops five to six figures and can get impossible to pay. Consumers in Raleigh, NC, have the option of bankruptcy for relieving the burden of certain exempt debts. However, many types of debts get different treatment in bankruptcy, including student loans.

Chapter 7 and Chapter 13 bankruptcy

Chapter 7 bankruptcy converts non-exempt assets to cash to pay unsecured debts such as medical bills and credit card debt. The trustee sells the assets and divides the proceeds among creditors. At the end of the bankruptcy, the consumer gets a discharge.

Chapter 13 bankruptcy devises a payment plan so that the debtor can gradually pay off the debt and keep all assets. It provides an option for debtors who want to pay the debt. However, this type of bankruptcy requires the debtor to have sufficient income.

Exceptions to student loans

Many consumers believe that bankruptcy cannot remove student debt. While the bankruptcy code was amended in 1978 to prevent abuse of the system, four out of 10 Americans still get all student loan debt or a portion of it discharged through bankruptcy. It still requires the debtor to meet certain criteria and file an adversary proceeding that is separate from the bankruptcy proceeding.

Courts commonly apply the Brunner test to decide whether to dismiss student loans. The Brunner test states that debtors must prove that paying the loan would create an undue hardship that would cause them to drop below a basic living standard.

The debtor’s situation must have no immediate end, and they must have made good faith attempts to pay the loan. In other words, they cannot take out a cash advance to pay the loan as a last-minute effort to pay since new debts won’t usually get discharged.

Bankruptcy-personal must include more than student loans. Small errors can get a case dismissed, so a consumer should seek the services of an attorney.