Most people know that student loans cannot be discharged in bankruptcy. If you are facing collections, however, there are some things that you should be aware of. This is how Chapter 7 can help.
Student Loan Collection
Students loan collectors and creditors have incredible collection power. They don’t have to sue you first or get a court judgment against you like most creditors. These creditors and collectors have extremely aggressive collection methods at their disposal. These special creditors can garnish your bank accounts and take your paychecks. They may also be able to grab your tax refund, or a portion of your Social Security benefit check.
The “Automatic Stay” in a Chapter 7 Filing
There are many reasons student loans are unique. The “automatic stay” that you file in bankruptcy will immediately stop student loan collection. It doesn’t matter if the student loan is discharged (written off), in your Chapter 7 bankruptcy case.
“Any act to collect, assess or recover a debt against the debtor” is stopped by the “automatic stop”. (Section 362(a),(6) of the U.S. Bankruptcy Act. (A “claim” is a “right to payment”–essentially, a debt. Section 101(5). The “automatic stop” is a temporary halt to “the commencement of or continuation”. . ?. of a[n] . administrative. Administrative. Administrative. . Proceeding against the debtor (Section 362(a)(1). “Administrative proceedings” includes the non-judicial collection actions described above, but they don’t include a suit. A Chapter 7 filing will also stop “the setoff any debt” that you owe, such as a Social Security or tax refund setoff. Section 362(a),(7). Filing bankruptcy will stop all student loan collection actions.
The break in collections lasts for the three to four months most Chapter 7 consumer Chapter 7 cases take. However, if you don’t manage the student loan properly in the interim, its collection can continue.
Dischargeability of Student Loans
Some student loans are permanently written off when a bankruptcy is filed. A student loan that is dischargeable must satisfy one condition. This condition can be a difficult and confusing one. You must not be causing undue hardship to the student loan. (Section 523(a),(8).
What does “undue hardship?” mean? It must be more difficult than a “hardship”.
It is possible that you feel your student loans are causing financial hardship. Federal courts have narrowly interpreted this phrase. These details are beyond the scope and reach of this blog post. However, it is important to remember that this condition can be very difficult to meet.
Chapter 7 Break-In Collections
You want to make the temporary collection break permanent during the three to four months of your Chapter 7 case. These are three methods to achieve this.
- Your bankruptcy lawyer will file an “adversary proceeding” in your Chapter 7 case if you believe that you are eligible for “undue hardship.” This is a specialized lawsuit that determines whether you are eligible for “undue hardship.” The bankruptcy judge would then discharge your student loan debt permanently. This would make the temporary suspension of collections permanent. Once you have paid off the debt legally, there would be no further collection.
- A bankruptcy judge might only allow partial repayment of student loans. The judge may decide that you would have to repay all the student loan(s), but only a part of them would. You would then make arrangements to repay the student loan debt at a lower monthly payment. Your student loan creditor will stop pursuing any further collection actions against you as long as you make the monthly payments.
- Even if you aren’t eligible for a discharge of “undue hardship”, your Chapter 7 case will still discharge most or all of your other debts. This should make it easier to repay your student loans. You should be able to make arrangements for payment. You may be able to do this through the payment-reduction program available for different student loans. Your Chapter 7 case would be closed if you have such a payment-reduction program. You will then be exempt from student loan collection at the expiration of the automatic stay.
Avoid Default And Preserve Options
Even if you are not eligible for “undue hardship”, the bankruptcy pause can still be very helpful. This could be crucial. This is because most student loan programs can only be applied for if you are not behind in your payments. These programs may be available to you if you file a Chapter 7 case before your payments have fallen behind. If you wait too long, you may lose your chance and become seriously handicapped.
This post was written by Trey Wright, one of the best bankruptcy Tallahassee attorneys! Trey is one of the founding partners of Bruner Wright, P.A. Attorneys at Law, which specializes in areas related to bankruptcy law, estate planning, and business litigation.
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