The guidelines are strict, but it can be done.
If you live in the Rancho Cucamonga, California area, you may have considered and discarded the idea of bankruptcy, because it doesn’t help with student loan debt. Yes, that tidbit has gotten a lot of press, but it’s not entirely true.
While student loans add another layer of complexity to the process, it is successful in certain situations. At the Law Office of Terrence Fantauzzi, I often work with clients to determine if their circumstances qualify for student loan bankruptcy.
The Student Loan Bankruptcy Exception
Prior to 1976, bankruptcy could discharge student loans. However, when the U.S. Bankruptcy Code was introduced in 1978, it limited the ability to forgive education loans. Through the years, what can and cannot be discharged has changed, and requirements tightened. Statutes affect loans differently, depending on whether you had private or federal student loans.
The Federal Judgeship Act of 1984 and Bankruptcy Amendments exempted nonprofit lenders from discharge when the phrase “of higher education” was removed. Additional legislation in 2005 further narrowed the dischargeability of debt related to education. During the 40 years that student loans were becoming harder to discharge in Chapter 7 bankruptcy, tuition surged.
Times and Perspectives Changed
By the mid-2000’s, the price of a college education skyrocketed, and so did the efforts to collect on student loan debt. Legislators tried to crack down on defaulted and discharged loans by increasing wage garnishment and allowing up to 15% of retirement benefits and Social Security Disability to be taken to repay defaulted student loans.
As of February 2020, U.S. student loan debt topped $1.56 trillion. Many Pasadena residents have six figures of student loan debt. Releasing borrowers from student loan debt now involves a separate process, which increases the complexity of filing bankruptcy. Today, you can get student loan debt discharged if you meet one of these criteria:
- Your school closed during your enrollment period
- Your school closed within 120 days of your withdrawal
- Your school engaged in misconduct
- You have a permanent disability
- You’re the victim of identity theft of institutional fraud
- Your repayment would impose undue hardship
Potential Hardship Discharge
To have your student loan debt considered for discharge, you must file a separate action, known as an adversary proceeding. During this process, the court looks at whether repaying your loans would cause undue hardship on you and your family. The requirements can be stringent, and less than half of those who file are successful in having their education debt discharged.
If you file chapter 7, the court looks at the value of your assets. In Chapter 13, you can file an adversary proceeding for the student loan debt that remains at the end of the payment plan. If you have significant medical debt, are unemployed or vastly underemployed, you may win a hardship discharge.
The laws regarding student loan debt and bankruptcy change frequently. Don’t try to take on the process by yourself. You deserve to have someone fighting for you. The road to filing bankruptcy can be long and invasive, and it isn’t always the best option. We may be able to negotiate with lenders and take advantage of hardship programs.
If bankruptcy is right for you, I can help you understand the process and ensure each step is completed correctly so that you can get financial relief and begin rebuilding your life. Contact me to set up a free consultation via phone, video conference or at my Rancho Cucamonga or Pasadena location.