If you cannot pay your debts, you can go to court. You have protection from your creditors. But it is hard to discharge a private student loan in bankruptcy because the process can be tricky and difficult. Read on to learn how the procedure works now as well as how recent court cases and pending legislation in Congress might give more options for overwhelmed students with private student loans.
Can you get rid of your private student loans in bankruptcy?
Before 1976, students could get rid of their private or federal student loans in bankruptcy, just like credit card debt. But the new law from 1978 made it so that students could no longer get rid of these payments.
Congress wished to make sure that those who had borrowed money for school could still get those loans paid off. So Congress said that if someone has borrowed money for school and they go bankrupt, they can’t get rid of those loans unless it is very hard for them.
Since the court ruled that it is possible to discharge private student loans in bankruptcy, there has been much discussion about the issue. But attorneys still caution that private student loans are not guaranteed to be discharged in bankruptcy– they can only be if special circumstances apply.
This is a hard question. Courts will answer it because Congress has not done so yet. But until they do, the bankruptcy code says that private student loans cannot be discharged in bankruptcy unless borrowers can show that it causes undue hardship.
How do you file bankruptcy with student loans?
Before you can get rid of your student debt, you need to go through bankruptcy. You have been behind on payments and have been unable to meet your financial obligations. Lenders and creditors might have already tried to take the money, but bankruptcy will stop them from doing that.
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After the bankruptcy proceedings start, you will need to file for an “adversary proceeding,” like a lawsuit in other courts. As the plaintiff, you can get debt relief for certain kinds of debts like private student loans.
During this legal proceeding, you will need to show the judge that you meet the strict requirements for having your debt discharged. If you don’t do this, it can be very hard to get your debt discharged.
You have to prove that it’s hard for you to leave your home.
It had been difficult to prove hardship. But now, there are three things you need to do. To show undue hardship, you need to read these criteria:
- You cannot pay for your house if you have to repay the loan.
- Based on the evidence, we know that this hardship will continue for a significant part of the time you are paying back your loan.
- You tried to pay back the loan before you filed for bankruptcy.
To prove that you can’t afford your mortgage, you need to show that it’s hard for you. For example, if you have monthly bills or medical bills, or a job loss notice, these can be used as evidence.
Student loan bankruptcy is in the news.
In the past, it was complicated to get a private student loan discharged into bankruptcy. But now, after these court cases, it is possible.
In one case, a man could not get out of paying for his student loans. Judge Elizabeth Strong said that he had to pay back the money he got from a scholarship or stipend. But in an appeal, another judge changed this and said that it did not count as a personal loan.
The women said that the code did not include student loans and education benefits. Calling a loan an educational benefit can be unusual. The court agreed with this and ruled that the U.S. Bankruptcy Code does not prohibit individuals from having their private student loans discharged in bankruptcy proceedings.
Some people think that the 2nd Circuit decision means that private student loans could be discharged. However, in June 2021, the United States Supreme Court refused to hear the case of a woman who wanted her private student loans to be discharged under a different standard. This means that it is still hard for people to get their private student loans discharged unless they are sick or have other problems like being in jail or being in bad health.
For now, it seems like the courts are not agreeing on whether private student loans can be discharged for bankruptcy. It might be easier to get these loans discharged if senators and representatives work together to pass a bill that has a 10-year waiting period.
Some people in Congress want to change the law so that you can get rid of your private student loans in bankruptcy. This is a virtuous thing because you might not be able to pay back your student loans, and they make it hard for you to buy a house.
Private student loans can be hard to repay. You might not be able to pay them back. Your lawyer might have a tough time fighting for you in court if you try to wipe out your private student loans through bankruptcy because the courts are not sure about this.
If Congress does not act, you will be better off looking for other ways to pay your student debt. You may need to speak with your lender or a debt settlement lawyer.
Also, Read FS Tax Conference 2021: The Future of Taxes