What Happens to Student Loans in a Philadelphia Bankruptcy?
As you may already be aware, student loans can’t usually be discharged in bankruptcy. There are exceptions to that rule, but the truth remains: student debt is very hard to get rid of.
So what happens to your loans, then, if you must declare bankruptcy?
The Brunner Test
First, let’s examine what it would take to get your student loans discharged under the “undue hardship” law. To determine whether you’d be eligible, courts will use the “Brunner Test.“
The Brunner test requires you to show:
- If forced to make student loan payments, even on the Income Driven Repayment plans, you and your dependents would not be able to maintain a minimal standard of living. Keep in mind this is a true poverty standard with no discretionary income whatsoever.
- This state of affairs is likely to persist for “a significant portion of the repayment period of the student loans.”
- You have made good faith efforts to repay the loans.
If you can meet the test the courts will cancel your student loans just like they would cancel any other debt.
Chapter 13 Bankruptcy
If you file Chapter 13 bankruptcy your student loans will be part of your Chapter 13 plan until the plan ends.
Here’s how that works. Say your plan requires you to pay $500 a month. The trustee for your plan will be distributing that to all your creditors. Your student loan servicer is one of those creditors, and they’ll receive some portion of that money along with them. If you have five creditors, for example, then they might get $100 a month.
The good news here is that the trustee is setting your loan payments for that three to five years, and they’re designed to be affordable for you under your current income. The automatic stay will also keep your loans from going into default
When the Chapter 13 plan is over, though, the balance of your student loans will remain, and you’ll still have to pay them. Most likely you’ll do that at your standard loan repayment rates. If you’re lucky, this will be an affordable amount once all your other debts have been dealt with.
Chapter 7 Bankruptcy
The automatic stay helps here too, keeping your loans out of default and halting all collection actions.
While your case is active, your loans will go into automatic forbearance. When you get your discharge payments will resume. As with Chapter 13, the hope will be that you’ll be able to manage your student loan payments once your other debts are taken care of.
You don’t have to live with financial hardship forever. Our team can help.
Call us to schedule a free consultation today. We’ll be happy to help you get started with your bankruptcy case.