Certain debts may not be eliminated through bankruptcy (they are “non-dischargeable”). These debts include alimony, child support, and usually student loans as well. Student loans can be a significant financial burden that is subject to interests and penalties when not paid off as required. Bankruptcy typically does not allow you to discharge your student loans, but it can be used in order to stop penalties from accruing and make your payments more affordable. You can only discharge student loans in bankruptcy if you can meet the high standard of proving that paying them back is truly an “undue hardship.” If you are handling overwhelming student debt and other types of debt, contact an experienced Montgomery bankruptcy attorney to find out whether filing for Chapter 13 would help.
Chapter 13 bankruptcy provides debt reorganization. This allows you to handle overwhelming student loans in conjunction with unsecured debts such as unpaid credit card bills. You can reduce or delay your monthly student loan payment during the three to five years of the Chapter 13 debt repayment process. After that, however, you will have to continue to pay your student loans pursuant to the terms of your loan.
While you typically can’t eliminate student loans by filing Chapter 13, you can obtain a more affordable monthly payment and stop penalties from accruing this way. If your disposable income only allows you to pay $300 per month through the course of your Chapter 13 debt repayment plan, this is the amount you would pay each month, even if your student loan payments would ordinarily be $500 per month. The interest would continue to accrue normally, but the penalties would stop.
Under very rare circumstances, you can try to have your student loans discharged through bankruptcy. Bankruptcy courts will rarely grant this discharge, but it is possible if you can show “undue hardship.”
Most of the time, a court will not find undue hardship. Losing your job or underemployment, for example, are not enough to qualify for undue hardship. Only things considered totally out of your control, like a severe medical condition or disability, may be an “undue hardship.”
Bankruptcy courts handle undue hardship differently, but one common test is the Brunner test. With this test, you must show (1) you are so impoverished you will not be able to maintain a minimum standard of living if you must repay the loan. (2) you will have the same financial situation for much of the repayment period, and (3) you tried in good faith to repay your student loans. In order to ask the court to discharge your student loan, your attorney will need to file a “Complaint to Determine Dischargeability of a Debt.” In other words, it will require a lawsuit inside of your bankruptcy case for which you will have to make separate arrangements to pay for with your attorney. These lawsuits, known as “Adversarial Proceedings,” are not a part of your bankruptcy case and receive a separate case number. The court will consider all factors and evidence to make a determination about your request.
Bankruptcy can be a challenging process and trying to get a student loan discharged for undue hardship can be particularly difficult. However, if you truly have an undue hardship and significant debt, an experienced bankruptcy attorney may be able to help you ask the court for relief. Alabama bankruptcy lawyer Charles Grainger can evaluate whether bankruptcy is a good choice for you and give you advice to avoid pitfalls along the way. We serve clients in South-Central Alabama from our offices located in Montgomery, Prattville, and Troy. Call us at (334) 260-0500 or contact us online to schedule a consultation.