When you start feeling like debts (such as student loans) are drowning your financial life, it's normal to contemplate about filing for bankruptcy. Since it requires a lot of legal experience and knowledge to navigate the bankruptcy and debt settlement systems in California, you'll need a bankruptcy attorney. At Los Angeles Bankruptcy Attorney, we help Los Angeles, CA inhabitants to deal with creditor harassment, wage garnishments, foreclosures, and repossessions. In this guide, our bankruptcy lawyers help you understand how filing for bankruptcy can help discharge your student loans.

Student Loans and Bankruptcy: An Overview

Bankruptcy is one of the options many borrowers consider when struggling to repay their student loan debts. A recent Make Lemonade survey revealed that over 44 million borrowers in the country have student loan debts totaling to $1.5 trillion. The study also pointed out that the average student loan debt was $40,000 in 2017 and $37,172 in 2016. Student loans are surpassing mortgages and credit card debts by ranking at number two in the consumer debt category.

The Make Lemonade survey also revealed that California, Texas, New York and Florida rank among the four US states with the highest amounts of outstanding student loan debts. Note that these four states make more than 20 percent of all student loan borrowers in the US. With these shocking numbers, you can understand why federal bankruptcy courts are making it difficult for people to discharge their student loans in bankruptcy.

How Have the Rules for Discharging Student Loans in Bankruptcy Changed?

Borrowers were allowed to have their student loans discharged before 1976. The US Congress agreed to amend the bankruptcy law to make these loans dischargeable only if a borrower has been repaying them for at least five years. Congress later extended this repayment period to seven years.

Borrowers were then mandated by the Congress, in 1998, to prove that repaying the student loans would impose an undue hardship on their financial lives. The “undue hardship” protection was later extended to include private student loans. This protection makes it possible to discharge student loans in bankruptcy once you prove the undue hardship you’re experiencing.

Today, some federal court judges are exploring ways of helping borrowers eliminate the burden of their student loans. They're encouraging bankruptcy lawyers to be at the service of debtors and are working to cancel private student loan debts owed to unaccredited schools. Student loan debtors are also being allowed to make full payments in about five years without incurring taxes. Though these rules are continually changing to make it favorable to repay student loans, the main concern is how filing for bankruptcy can help discharge the loans.

Can Your Student Loans Be Discharged in Bankruptcy?

One of the misconceptions people hold is that it's impossible to have student loans discharged in bankruptcy. The truth is that though it's possible to have your private and federal student loans erased in bankruptcy, this process is usually tricky than erasing other debts. Your bankruptcy lawyer needs to give the court proof that you're being forced to settle the loans while under undue hardship. "Undue hardship," as highlighted in the US Bankruptcy Code, may means that your current financial situation doesn’t allow you to meet obligations such as paying debts.

Which Courts Have the Jurisdiction Over Bankruptcy Cases?

All bankruptcy cases are usually handled in US federal courts. Though various state laws allow for "receivership" proceedings, all bankruptcy courts in the US are considered as federal. "Receivership," in this context, refers to a remedy for bankruptcy cases that allows secured creditors or loan originators to recover outstanding loan amounts when you refuse or neglect paying them.

Understanding the bankruptcy court system helps you get a clear picture of the potential avenues your case will take. The US bankruptcy court system is categorized into levels including trial courts, appellate courts and Supreme court. The basic form of a trial court is a district court, which handles all cases in a specific jurisdiction including bankruptcy issues. Bankruptcy courts operate as a division of district courts.

The Federal Rules of Bankruptcy Procedure is a statute that governs all proceedings that transpire in bankruptcy courts. Such rules determine the procedures of bankruptcy trials and proceedings including the timeline for filing your bankruptcy schedule. You're mandated to have your bankruptcy case filed in the federal district court operating in your primary area of residence. Your bankruptcy lawyer can help you choose the court and have the lawsuit filed.

Which Ways Can You Use to Prove “Undue Hardship” to Discharge Your Student Loans?

Getting your student loans erased requires a certain type of legal proceeding that's referred to as "an adversary proceeding." In this proceeding (which involves a case filed against your student loan originator), your bankruptcy lawyer should help you prove that your student loan debt exerts "undue hardship" on your current financial situation. Your attorney has to give evidence/facts to prove any legal defenses presented in court.

Using the “Brunner Test”

The “Brunner Test” helps determine undue hardship when discharging your student loans in bankruptcy. The US Congress hasn’t yet given a legal definition for the phrase “undue hardship” and hasn’t yet delegated any authority to define this phrase. However, the US federal courts agreed on a legal standard that allows for two tests (the Totality of the Circumstances Test and the Brunner Test) to be used in proving undue hardship.

The phrase “Brunner Test” was named in reference to a 1987 bankruptcy case filed by Marie Brunner (the plaintiff) against the New York State Higher Education Service Corporation. According to the Brunner Test, you must prove the following:

  • You cannot maintain a minimal living standard for yourself or any dependants based on your present income and expenses if mandated to make loan repayments

  • Additional circumstances indicating your financial instability will likely persist over the course of the student loan repayment period

  • You have made or showed good faith in repaying the student loan

The Totality of the Circumstances Test, on the other hand, requires you to meet certain conditions when proving undue hardship. They are as follows:

  • Your past, present and possible future sources of finance

  • All of your living expenses (they must be reasonable and necessary to you)

  • Any other supportive/relevant circumstances and facts.

Either way, your main task is to meet these conditions to prove undue hardship. The conditions established in both tests call for the evaluation of various factors in determining whether you or your dependents will suffer undue hardship when you're repaying a student loan. Such factors include your history of mental illness, medical, family and work history, educational level, payment history and prospects for employment. Your willingness to avail yourself to make the repayments also counts in this case.

What Kind of Evidence is Needed to Support Undue Hardship?

The best way your bankruptcy can guarantee good outcomes for your case is by using your financial documentation and other pieces of evidence to support your claim. It would help if you co-operated, in every means possible, with your lawyer to increase the likelihood of having your student loans discharged. You may assist by sharing documents such as W2 forms, tax returns, bank statements, credit card statements and records of your monthly payments with your lawyer.

Present your lawyer detailed reports or receipts of expenses (including household maintenance and food bills), evidence of job loss (if applicable) and proof of having dependents (through tax returns). Medical records or letters obtained from a medical practitioner to indicate injury or physical disability can also help support your case. Any receipts you share should highlight the services or goods purchased by you rather than someone else.

To stand a chance of discharging student loans in bankruptcy, you should give documentation showing that you agreed on certain terms with the loan servicer and tried to make the loan payments. Your loan statements (monthly ones) and other proof of transactions can help support this claim. You should also keep screenshots or copies of emails showing that you use other measures to settle the loan or changed your repayment plans. If any communications were made via phone with the lender's representatives, keep track of the call logs.

What’s the Process for Having a Student Loan Discharged in Bankruptcy?

Before discharging a student loan debt in bankruptcy, you should understand what the word “bankruptcy” means. Once you file for bankruptcy, you’ll be seeking a legal remedy to stop debt lawsuits, wage garnishments or debt collection calls. With this information on bankruptcy, you can proceed to have your student loan debt discharged in the following ways:

  1. Ensure that You Have Exhausted Other Options

    Other than filing for bankruptcy, you have two options to ease the burden of student loan debts. These options include following an income-driven repayment plan, paying off other debts and considering a Public Service Loan Forgiveness program. PAYE (Pay As You Earn), REPAYE (Revised Pay As You Earn) and IBR (Income-Based Repayment) are some income-driven repayment plans you may consider. When using any of them, factors such as your family size and income will be used to calculate ideal loan repayment amounts for you. You also get to have your federal student loans forgiven after a period of 20 to 25 years.

    The second option is to pay off debts with higher interest rates than the interests rates of your student loan debt. Such a strategy helps you free up the money needed to reduce your student loan debt. You may consider getting a single personal loan (issued at a low-interest rate) to pay off your current credit card debt. This strategy is infamously known as credit card consolidation.

    A Public Service Loan Forgiveness (PSLF) program acts as a federal program for encouraging students to pursue low-paying careers and make 10-year repayments for student loan debts to qualify for tax-free forgiveness. Under this program, you may consider pursuing careers such as the military, public interest law, teaching or firefighting. A PSLF program may suit you if you’re planning to pursue a public service career and you’re willing to wait for ten years for your student loan to be forgiven.

  2. Enlist the Help of a Bankruptcy Attorney

    Hiring a bankruptcy attorney may be the best option if you see no other way of paying off your student loan debts in the next five years. The legal help may also come handy when the debt amount is more than 50 percent of your income, or you're not making any progress repaying the debt. Seek legal assistance if the repayments are limiting you from meeting your financial goals including saving for emergencies or retirement.

    You deserve peace of mind during the loan debt discharging process. Furthermore, a bankruptcy lawyer is your best hope to ease the stress and frustration that comes with pursuing the process. After finding one, your role as the client is to disclose any information that may help you succeed in this pursuit.

  3. Have Your Bankruptcy Attorney File for Bankruptcy

    The three types of bankruptcy include Chapter 7, Chapter 11 and Chapter 13 bankruptcy. Your lawyer should help you pick the right one. A Chapter 7 bankruptcy is ideal for consumers with unsecured debts including personal loans or credit card debts.

    You’re required not to have filed a Chapter 7 discharge within the past eight years or filed a bankruptcy petition within the past 180 years to qualify for this form of bankruptcy. A Chapter 13 bankruptcy, which is suitable for retaining assets taken for secured debts, allows your debts to be restructured in payment plans ranging from three to five years. Filing your taxes on time and having a regular income are some of the requirements for this kind of bankruptcy.

    Unlike Chapters 7 and 13 bankruptcy, which are meant for individuals, Chapter 11 bankruptcy is suited for businesses and corporations. As a business owner, you’re required not to have dismissed your bankruptcy filing or filed a bankruptcy petition in the past 180 days. Chapter 11 bankruptcy helps a business or corporation keep its operations afloat when struggling to pay debts.

  4. File an Adversary Proceeding Through Your Lawyer

    An adversary proceeding (which differs from the main bankruptcy case) is a type of lawsuit filed by a bankruptcy lawyer against a particular corporation. This lawsuit helps solve disputes that can’t be handled in a bankruptcy case. Your lawyer may file it to help you obtain relief from the burden of your student loan debt.

    Like other types of lawsuits, adversary proceedings involve complex legal questions and factual circumstances. All litigants participating in the case must comply with the Federal Rules of Bankruptcy Procedure and the United States Bankruptcy Code. They're also required to observe customary and traditional rules of the bankruptcy court. Failing to obey such rules may result in your case being dismissed.

What are the Requirements for Initiating an Adversary Proceeding?

Most adversary cases, filed by a debtor against a creditor, involve having debts discharged. Filing of a Complaint is the first step towards starting an adversary proceeding. The Complaint is usually in the form of a formal, written statement used to present facts that may help dismiss certain debts. Expect the Complaint to consist of the following parts:

  • A case caption identifying the bankruptcy case, the bankruptcy court and your adversary information

  • The narrative statement that identifies names and addresses of both participants of the adversary proceeding and information identifying their relationship

  • Valid reasons why you’re having your case filed in a particular bankruptcy court

  • Claims or allegations that you’re making against the other party

  • The kind of relief you expect to get from the bankruptcy court (this information is usually contained in the final paragraph of the document)

Once the adversary proceeding starts, the office of the bankruptcy court clerk will open a separate docket for recording all activities that transpire in this proceeding. Your adversary proceeding will be given a unique adversary number. The lender (who serves as the defendant in this case) will be given a particular timeline for filing and sending you written responses to your complaint.

Will You Make Any Court Appearances?

Expect several pretrial conferences or hearings to occur until both parties decide to settle or your case is dismissed. Majority of the bankruptcy courts in the US prefer having a judge to hear and rule over a bankruptcy case than having it tried in front of a jury. One of the reasons is that bankruptcy courts are known to handle bankruptcy cases efficiently and fast.

Your lawyer should represent you in the mandatory hearings, which include Chapter 7 reaffirmation hearings, Chapter 13 confirmation hearings or motion/objection hearings. Your bankruptcy attorney should also advise you about the hearings to expect before filing for any bankruptcy.

Have Your Student Loan Debts Dropped in Bankruptcy With the Help of a Lawyer Near Me

Your primary goal for working with a lawyer is to seek relief from the burden exerted by your outstanding student loan debts. Consulting with a law firm such as ours (Los Angeles Bankruptcy Attorney) can help you cancel dischargeable debts and give you the opportunity for a fresh financial start. We've been helping clients from Los Angeles, California with cases involving foreclosures, repossessions, creditor harassment and wage garnishments. Contact our Los Angeles bankruptcy attorney now at 424-285-5525 for a free bankruptcy consultation.