Student Loans and Bankruptcy

The cost of a college education has become so high that student loan balances are increasing faster than any other category of debt. By the end of 2015, the combined outstanding student loan balance reached $1.2 trillion, with individuals owing an average of $26,000.

Considering that many people cannot find a job after graduation with pay high enough to meet expenses and also cover their high student loan payments, it is no wonder that borrowers wind up seeking debt relief.

High student loan payments have become a large part of the financial burden which leads to filing for bankruptcy. It is commonly believed that student loans cannot be discharged in bankruptcy, but fortunately, this is not always true.  A knowledgeable bankruptcy lawyer can often find ways for you to obtain relief from at least part of your student loan debt or find resources such as deferments that enable you to get caught up on student loan payments. And filing bankruptcy can make it possible for you to get a fresh financial start by wiping out other debts.

The skilled and seasoned Ohio bankruptcy attorneys at Fesenmyer Cousino Weinzimmer understand that financial problems can happen to even the most well-intentioned people.  We offer a free consultation to evaluate your financial situation.  We can help by looking at your income, your student loans and other debts, and your goals and coming up with a plan that’s best for you.

What is the Law Regarding Student Loans?

Before 1976, student loans could be included in bankruptcy proceedings. However, because of high default rates, Congress began passing laws that banned federal student loans from bankruptcy discharges within a certain amount of time. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 modified the bankruptcy code to allow discharge of student loans only in the case that the debtor is able to prove that repayment would cause undue hardship.

Ohio courts follow the Federal bankruptcy laws, which state that you must qualify under the undue hardship standard, section 523(a)(8) for a discharge of student loans.

To qualify, you must meet the “Brunner” test, named after the case that established the standard, to determine whether your student loans are an undue hardship.  This is a three-part test used to evaluate whether you are able to continue to pay off a debt:

  1. Have you made a good faith effort to repay the student loans?
  2. Will you be unable, based on your current income and expenses, to maintain a minimal standard of living for yourself and any dependents if forced to repay the loans?
  3. Are there additional circumstances that exist that indicate that this state of affairs is likely to persist for a significant portion of the repayment period for the student loans?

Does It Pay to File For Bankruptcy?

Although undue hardship can be difficult to prove, it is still possible. Despite this, since most people do not believe that student loans are dischargeable, few people try. According to a report in the American Bankruptcy Law Journal on student loan discharges, only 0.1% of people who file for bankruptcy with student loans try to include them in their bankruptcy proceedings.

However, when people do attempt to include their student loans in bankruptcy, they have a chance of winning or to have at least some of their debt discharged. The study found that 40% of people who attempted to include their student loans in their bankruptcies had some or all of their debt discharged.

If you can prove undue hardship, your student loan will be completely canceled. Even if you cannot prove undue hardship, filing for bankruptcy can give you some breathing space, as it also automatically protects you from collection actions on all of your debts, at least until the bankruptcy case is resolved or until the creditor gets permission from the court to start collecting again.

Chapter 13 Bankruptcy and Student Loans

Only student loan funds that were used for the cost of attendance, as defined by the Higher Education Act, can be discharged in bankruptcy. These costs include tuition, books and indirect costs that are related to your enrollment.

If student loan debt cannot be totally discharged based on undue hardship in either a Chapter 7 or Chapter 13 bankruptcy, there are still certain advantages to filing a Chapter 13 bankruptcy. Payments can be delayed and managed since Chapter 13 bankruptcy allows you to repay some or all of your debt affordably over a three to five-year period.  Your plan, not your loan holder, will determine the size of your student loan payments.  Plus, the automatic stay provision of Ohio bankruptcy law means that the phone calls and letters from your creditors will stop during this time.  If you successfully complete the court-approved payment plan, the debts covered by the plan are discharged.

Since your student loan payments will be part of your repayment plan, you may pay a significantly reduced amount or possibly nothing at all toward the student loans during the repayment period. When you come out of bankruptcy, you can try at this point to discharge the remainder of your student loan based on undue hardship.  If the loan still cannot be discharged, you can continue to repay what is left on your student loan.

Contact Us for a Free Consultation

If you have questions about your student loan or any other debt, the seasoned and compassionate Ohio debt-relief attorneys at Fesenmyer Cousino Weinzimmer offer a free consultation to evaluate your entire financial situation.  Even if total discharge is not possible, we can help you explore other options, such as negotiating with the lender to get more favorable terms, and modification or consolidation of the student loan debt.

We are dedicated to getting the best possible outcomes to relieve you of financial troubles and help you decide on the path to a brighter future that makes sense in your individual case.  We understand what you are going through and will walk you through the process.

Delaying can only worsen your situation, so call the Ohio bankruptcy attorneys at Fesenmyer Cousino Weinzimmer today!  Call one of our conveniently located office branches at 614-228-4435 (Columbus), 937-222-7472 (Dayton), or 877-654-5297 (Cincinnati) or email for your free consultation so we can determine what debt relief solutions will work best for you.

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