What Happens to Student Loans if You File Bankruptcy in Pennsylvania?
People in Philadelphia call bankruptcy attorneys because they have questions about discharging credit card debt, medical bills, personal loans, or other debt. Some are behind on their real estate taxes or mortgage payments. In most of these situations, our Philadelphia bankruptcy lawyers are here to help you put together a workable solution. However, every bankruptcy attorney will hear “what about my student loans” at some point.
Student loan debt is a growing national concern. Americans owe an estimated $1.53 trillion in student loan debt. Defaulting on student loan payments could adversely impact your ability to rent an apartment, purchase a car, or qualify for a mortgage. As you may already be aware, student loans cannot 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? In some cases, filing for bankruptcy can be beneficial even if your student loan debt remains. At Young, Marr & Associates, our experienced attorneys and staff will evaluate your unique circumstances and work to come up with a workable solution. Call (215) 701-6519 if you are struggling with student loans or any other kind of debt.
The Brunner Test and Philadelphia Bankruptcies
First, it is important to 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. Below, each element is discussed in more detail.
Inability to Maintain a Minimal Standard of Living
The phrase “minimal standard of living” appears very subjective. What one person considers a minimum standard might be luxurious to another. When discussing the Brunner Test, it is important to understand what the court considers a minimal standard of living.
The first thing the bankruptcy court will consider is your financial situation. More specifically, the court will evaluate your monthly income, including whether you have a job or are self-employed. Your fixed expenses, such as rent, mortgage, or car payment, will be reviewed. Next, your variable expenses, including groceries and utilities, will be examined. The court frowns on non-essential expenses, such as gym memberships and cable television.
You will have to prove that you have cut any unnecessary expenses from your budget and just have enough income to maintain a minimal standard of living. Your circumstances matter. For some people, a car payment might be an unreasonable expense. However, even if a car payment is necessary, a new car would be considered a non-essential luxury. Our Pennsylvania bankruptcy lawyers will thoroughly review your situation to determine if you pass this prong of the Brunner Test.
Your Financial Hardship Will Continue
Many people fall on hard times. A job loss, an unexpected illness, or a large unanticipated expense could result in an inability to pay your regular bills. In most cases, such circumstances could be grounds for discharging unsecured debt. Unfortunately, that is not the case with student loans.
To pass the second prong of the Brunner Test, you must prove to the court that your financial hardship is permanent or likely to last over the life of the loan.
If your situation is not permanent, a bankruptcy judge might grant you a partial discharge. The court will weigh the severity of your financial hardship against the length and amount of your loan. If you are granted a partial discharge, a portion of your student loan debt will be eliminated. The court will examine your income and expenses to determine what you could afford to pay.
As stated above, having your student loan discharged is difficult. However, in certain cases, a court could adjust your interest rate or length of the loan to ease your monthly payment. Therefore, if your case is on the border, our Bucks County bankruptcy lawyers might advise attempting to discharge your loan, even if the likely result is just a small amount of relief.
Good Faith Effort to Pay Your Loan
Proving that you are experiencing financial hardship and are only maintaining a minimal standard of living is only part of the Brunner Test. The third prong is proving that you have made a good-faith effort to pay back your loans. However, what constitutes “good faith?”
Typically, you could establish that you made a good faith effort to pay your loan if you have applied for income or need-based repayment plans or made some payments during the life of your loan. While not making a payment presents an additional hurdle, it does not preclude you from passing this prong of the Brunner test. If you have never made a student loan payment, you will have to show that your hardship existed from when your first payment was due.
Chapter 13 Bankruptcy and Student Loan Debt in Philadelphia
If you file Chapter 13 bankruptcy, your student loans will be part of your Chapter 13 plan until the plan ends. This means that you could defer direct payments to your lenders for three to five years. However, Chapter 13 is designed to allow a filer to reorganize their debt. The key component in a Chapter 13 case is the bankruptcy plan. A debtor proposes a plan to pay their creditors. The amount paid depends on an individual’s income and assets.
For example, if you qualify for Chapter 7 and have a monthly student loan payment you cannot afford, you might consider filing Chapter 13. Your monthly income and necessary expenses will be listed in your bankruptcy documents. The remainder will have to be paid to your creditors.
Here is how that works. You cannot afford your $700 monthly student loan payment along with your rent, food, and utilities. When our Philadelphia bankruptcy lawyers calculate your income and reasonable expenses, you are left with $175. Therefore, your monthly trustee payment would be approximately $175. The money you pay will be distributed among all your creditors that filed a claim in your case – including your student loan lender.
The advantage of Chapter 13 is it allows a filer to pay a manageable monthly payment without worrying about going into default. The bad news is that once your case is over, the balance of the student loan will remain. Additionally, it was accruing interest over the five-year bankruptcy.
In many cases, a debtor’s financial position will have improved over the five years. Furthermore, if a substantial amount of other unsecured debt was discharged, a debtor’s monthly expenses could be lower than they were when the case was filed. While Chapter 13 will not eliminate your student debt, it could put you into a better financial position.
Chapter 7 Bankruptcy and Student Loans in Philadelphia
Chapter 7 is more streamlined than Chapter 13 – a debtor will usually see a discharge in four or five months. However, the automatic stay helps here too, keeping your loans out of default and halting all collection actions. This short respite could be the breather a person needs to regroup and get back on their feet.
Your student loans will go into automatic forbearance while your case is active. 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.
Our Philadelphia Bankruptcy Lawyers Are Here to Help With Your Student Loans and Other Debts
You do not have to live with financial hardship forever. Our team of experienced Norristown bankruptcy lawyers are here to help. At Young, Marr & Associates, we understand the stress that accompanies overwhelming debt. In many cases, the hardest part is realizing that you have options. To take your first step towards a fresh financial start, call our law offices at (215) 701-6519. Your initial consultation is free of charge.