Student loan debt is a significant burden for many people around the country. When you run into financial issues and consider filing for bankruptcy as a solution, you might wonder how bankruptcy affects student loans in California. The relationship between the two is complex and often requires the help of a California bankruptcy attorney.
Understanding Bankruptcy
Bankruptcy is a legal process under federal law that allows businesses or individuals to eliminate or repay debts that they are unable to afford. There are two main types of bankruptcy.
- Chapter 7 bankruptcy. This type of bankruptcy is a liquidation process. It involves selling non-exempt assets to pay creditors, and most qualifying unsecured debts are discharged at the end of the process.
- Chapter 13 bankruptcy. This form of bankruptcy involves making a court-approved repayment plan to pay off debts within 3-5 years. At the end of the repayment period, certain remaining unsecured debts may be discharged.
The difference between these two bankruptcy types affects what you will owe after the bankruptcy proceedings. Under Chapter 7, your loans are wiped out completely if you are approved. Under Chapter 11, it is possible to discharge the loans, but the goal is to manage payments.
Bankruptcy and Student Loans
Student loan debt in the U.S. is over $1.8 trillion, with about 93% of it from federal student loans. Federally guaranteed student loans are generally not eligible to be discharged under bankruptcy laws. Student loans received from the government must be repaid unless you can demonstrate undue hardship.
California uses the Brunner Test to determine if someone needs to continue paying their student loans. The test is based on three factors.
- You can’t maintain a minimal standard of living if you have to keep paying your monthly loan payments.
- Your financial situation is not going to change at any point during the loan repayment.
- You have made a good-faith effort to pay your loans and have not tried to get out of paying them.
It is very difficult to pass the Brunner Test, and in many cases, courts stringently apply these criteria, making it difficult for borrowers to discharge their student loans.
Qualifying for Loan Discharge Through Bankruptcy
If you have a bankruptcy case, you may consider pursuing a discharge. You might qualify for this if you:
- Are permanently disabled. This means you no longer work and will not be able to work in the future.
- Are 55 or older. If you are over 55 and have been working for 20 years or more, and are not able to increase your income or are unable to afford the payments on your current salary.
- Have dependents. If you have dependents and need to support them for at least ten more years or for the rest of the loan repayment period.
Private Student Loans and Bankruptcy
If you have private student loans in addition to federal loans, they can be discharged in bankruptcy if they don’t meet the legal requirements of a qualified education loan. A loan that falls outside the definition of a qualified loan can be treated as ordinary debt and be discharged.
When a private student loan is used for an eligible program at an accredited school, it is qualified and protected under 11 U.S.C.§523(a)(8). If the loan amount exceeds the cost of tuition, or it is not used for an accredited school, it could be argued that it is not a qualified education loan.
If your private student loan meets the requirements for a qualified education loan, you must go through the same process of proving hardship in order to get it discharged.
Hire a Bankruptcy Lawyer
If you are having trouble making payments and want to understand how bankruptcy affects student loans in California, it’s a good idea to hire a bankruptcy lawyer.
An attorney can:
- Determine if you are eligible for discharge
- File the adversary proceedings in the U.S. Bankruptcy Court in Riverside
- Apply the latest Department of Justice and Department of Education guidelines
- Help navigate federal repayment programs and negotiate with lenders to reduce your monthly payments.
- Negotiate with lenders when appropriate.
Since student loan debt involves both state and federal laws, an experienced attorney who is familiar with bankruptcy laws can take on the careful coordination these cases require.
FAQs About Affects Student Loans
Are Student Loans Protected From Bankruptcy?
In general, student loans are not automatically discharged in bankruptcy. In some cases, they may be discharged if you can prove undue hardship, but this requires filing a separate adversary proceeding and meeting a strict legal standard. Bankruptcy can, however, provide relief by eliminating other debts, which may make student loan payments more manageable.
What Is the Success Rate of Bankruptcy for Student Loans?
The success rate of bankruptcy for student loans has increased to 87% since 2022, when the administration established clearer guidelines for borrowers. While the success rate is high, the number of bankruptcy filings is low. The reforms led to only several hundred additional bankruptcy cases, while over 40 million people carry student loan debt.
What Can’t Be Wiped Out By Bankruptcy?
Under Chapter 7 bankruptcy, child support and alimony are fully enforceable. Most tax debts and debts from fraud are not eligible to be discharged under bankruptcy. In addition to these debts, fines ordered by the court and penalties, such as traffic tickets, are still enforceable. If you want to keep your home or car, the payment needs to be made, even after declaring bankruptcy.
Do Bankruptcies Go Away After Seven Years?
A Chapter 13 bankruptcy is usually removed from a credit report after seven years, but a Chapter 7 bankruptcy will stay on your credit report for 10 years. The expiration timeline starts the month you first filed with the court. For the time period the bankruptcy is on your credit report, it can affect your score, but the impact will decrease over time.
Contact a Bankruptcy Lawyer
If you are facing bankruptcy and have questions about how it will affect your student loans, don’t wait to contact Evan L. Smith, Attorney at Law. He understands the long-term challenges these cases can create and understands the range of options that may be available.
