Bankruptcy Discharge

A bankruptcy discharge or a discharge in bankruptcy refers to a court order which permanently releases a person from any debt amount. It happens because of the inability of the debtor to pay back the loan amount. After the court decides and approves bankruptcy discharge, the borrower does not have any right to contact the debtor or force him/her to pay the money back. Let’s look at some of the recent updates on the case. 

In 2020 it is easier to qualify for Bankruptcy Discharge because of the recent rule changes in the system. Student loans have been a hot topic for over a decade now, and there are millions of struggling students from loan debts. Some of those students apply for student loan forgiveness while others choose loan discharge as a solution. On February 21, 2018, President Trump announced that there would be changes regarding student loan discharge, and the loan lenders, servicers, and universities will be evaluated carefully to see if there are illegal practices involved.

Most of the students are not happy with this call of the president because it is the same person who tried to stop the Public Service Loan Forgiveness and BDAR program beforehand. The complexity of the case will be analyzed in later paragraphs. For now, let’s review the statements from officials regarding the Bankruptcy discharge and find out what will happen next for all the students who are waiting for loan discharge.

Department of Education Memo on Bankruptcy Discharge

According to the Market watch’s post, the Department of Education’s memo on the Bankruptcy loan Discharge. In that memo, DOE stated that student loan holders need to rework on the evaluation criteria for bankruptcy discharges. This can turn out to be good news for all the students who are waiting for the results of their application. Currently, the laws clearly state that you cannot get rid of student loan debt with discharge unless the amount is very high. So, let’s say that you cannot support yourself financially, and if you are forced to pay for these loans, you would not be able to cover basic needs like, food, water, and shelter. In these types of cases, your student loan debt is placed on undue hardship.

As you can see, the criteria are very harsh, and the DOE is selective about applicants as well. These types of things make students think that it is virtually impossible to wipe out student loans by using bankruptcy discharge. Although, remember to not lose hope because of the recent changes. President Trump and DeVos are trying to make positive changes to these rules, and we can see this from student loan reforms announced by the federal government.

Jerome Powell’s View on Student Loan Bankruptcy Discharge laws

The Chairman of Federal Reserve Board Jerome Powell spoke out his mind and blamed the debt system, the law, and unfortunately argued that “some people, organizations” are deliberately making the case difficult for students to discharge loans. He added that along with all types of debts, they do not allow the debt issue with bankruptcy. Who is to blame in this case? Several people are behind all these procedures and are trying to alter the will of students regarding student loan debt discharge. Those actors are Debt Collectors, Student Loan lenders, Big Banks, and Wall Street investors who are earning trillions of dollars from student loans. So, what can you do to cover your debt amount?

Where do you need to seek help?

If you are struggling with the debt, you need to get professional help. In that case, Student Loan Debt Relief Agencies are a good option. Why? It is better to approach these agencies because they deal with thousands of student loans and other procedures regarding debt relief/forgiveness/discharge. That is why you can always count on these organizations. Whenever you want to get a consultation, it is simple enough to call the Relief Helpline and book a meeting. For Federal student loan discharge, you need to call: 1-888-906-3065. For Private student loan relief, you need to call: 1-877-317-0455. After the call, you can either go to their office or ask for help via phone. What can these organizations do for you? The Student loan Debt Relief can help you by:

  • Investigating the case
  • Evaluating available options for repay
  • Pursuing forgiveness benefits
  • Consolidating the student loans
  • And give you guides on how you can get rid of the debt amount.

What about private student loan discharge?

For getting help with your private student loans, you need to call McCarthy Law PLC (number mentioned above). By contacting them, you will explain your particular case. After that, McCarthy will negotiate with student loan lenders to decrease the amount of payment. During that time, you can repair your credit score because the monthly payment rate will be reduced.

It is not easy to get a loan discharge though that does not mean that it is impossible. The act about undue hardship came to the scene in the late 1970s as Congress passed the law regarding bankruptcy loan discharge. This act mentions that the government plans to ban bankruptcy for solving student loan debt issues. Though, there was a loophole in the act as it has a minor exception. That exception was: 

If students can prove that paying for student loan debt will create an undue hardship on their personal life, they can do it through bankruptcy. 

So, what was the real meaning of this term?

That is the problematic issue with that law because students could not find an exact definition or condition that determines undue hardship. It is up to court judges to decide whether or not a particular case can be considered an undue hardship. In recent years, the struggle of students led to some changes in the rule book. For decades, no one was able to solve their student loan debt issue through bankruptcy. However, recently it became more flexible and seems like a possible solution.

The changes are quite good, and there are hundreds of students who got approval from DOE regarding the bankruptcy discharge. Though it is only a small sample size, if we consider the number of students who applied for this program and the number of students who got approval, you will see that student loans discharged through bankruptcy rarely get approved. You can try this option as well, but be informed the odds are against you.

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History shows the difficulty level of Bankruptcy Discharges

For over 50 years, students have had a hard time in court while trying to convince judges about undue hardship rules. That is the main reason why there were so many applications and only a few approvals. The law was clear. Students were asked to give evidence that by paying for the loan debt, they would not be able to maintain the basic standard of living. Besides that, they were asked to prove that their living conditions would not change.

For instance, they would not be able to find a job, inheriting money, and so on. This was the hardest part of proving their case because judges do not believe university graduates and young people who think that they are unable to find a job. Mostly older people got the chance to prove undue hardship rules. If we look at the average age of approved candidates, we can see that the age factor is a real barrier. Interpretations are hard as well as conditions that is why so many students gave up the fight and tried to find alternatives to a bankruptcy loan discharge.

Things Are Changing to Right Direction

Recently courts are slowly changing their assessment criteria for students applying with undue hardship rules. The rate of the accepted applications goes up, and students are hoping to get more positive news/updates on this case. Once in a while, this might happen, so it is not as hard as it was decades ago. To see if you will get approval from courts regarding the case, you need to have information about their eligibility criteria and tests that defines the qualification for undue hardship rule. Before giving information about those tests, let me remind you that DOE has published a list of universities that cannot use loan discharge. You need to check that list before writing an application to see if the students of your university are eligible to apply or not.                                                                            

The Undue Hardship Tests

Currently, we have four main testing criteria for defining whether or not the applicant truly deserves to use undue hardship to wipe out the student loan debt. If you can pass these tests, then you will get a complete discharge. Those tests are:

  • The Brunner Test
  • The Johnson Test
  • The Totality of Circumstances Test
  • The Bryant Poverty Test

Each of these tests is designed to measure and rate how badly your personal life is affected as you go on to pay back the student loan debt. They try to determine if the loan debt is keeping you back from pursuing pleasure in life or how it will lead to your death. Through these tests, you need to prove that you may die from hunger as a result of loan debt. Let’s separately discuss those tests and see what the requirements are and how the process evolves in court.

The Brunner Test

You need to meet three conditions to pass the Brunner test for student loan discharge. Evaluation considerations for Undue Hardship are:

Poverty

Poverty, in this case, means that by continuing to pay for the student loan debt, you may end up with nothing, and your current salary will not be enough even to support yourself or maintain a minimal standard of living for you and your family members.

Persistence

Your current condition and salary will not increase shortly. So, that means you will not be able to keep up with loan payments, especially under the current schedule.

Good Faith

You are trying to pay back for the loans, though despite all your struggles, you cannot pay it back. Good Faith should prove that you accumulate almost your whole salary for the debt but cannot afford to pay it back. You need to have evidence that you did not hide any money from them, or you change your spending habits and acquire the minimalist approach. But how do you prove it?

It is not a simple thing to prove that you are poor and need financial assistance. To prove it, you need to show that you cannot:

  • afford to buy food
  • pay for electricity, water supply
  • do not renew your car, phone
  • do not buy new supplies
  • do not use the latest tech gadgets
  • spend money on entertainment
  • and taking vacations.

In short, you need to spend (your lifestyle) like a poor person. If your monthly balance sheet appears miserable while in court, your chances will be stronger. You should drive an old car (or do not even have one); you should not own fancy suits or wear flashy jewelry of great value. Doing either one of these things will diminish your chances of getting approval from the court, according to the Brunner Test.

The Johnson Test

Just like the Brunner test, The Johnson test also aims to find out whether or not paying for load debt harms your daily life. Though, this test is more comprehensive than the previous one. The test evaluates various matters, such as:

Employment and Income of the Student

The court will analyze your current income, employment opportunities, hourly, and monthly salary. They will compare that data with the federal poverty line to see if you are that poor.

The Health of the Student

The court will analyze your health condition for now and move forward. If you are healthy, then it means that you will have more opportunities to stay in the workforce and earn money. So, that will negatively impact your case. It is unfortunate to say, but if you have a chronic disease or live threatening illness, your chances of getting student loan discharge as a result of bankruptcy increases.

Dependents

The condition of the dependents (wife/husband, kids) is very important for evaluation. If you can prove that your family members are adding a financial burden to your life, then you will have a better chance of getting approval. For example, if you have 6-7 children and your wife is not working, then your chances are considerably high for undue hardship rules.

Good Faith Efforts

Effort is a crucial factor that can determine the result in this test. The court will analyze whether or not you tried hard to find a job, or is it your fault to become this poor. For example, if you were an alcoholic and was fired from previous jobs because of that, then you will not be able to get help from the court. Irresponsible and negligent actions by people can alter future opportunities such as this one.

How can you prove that you deserve the bankruptcy discharge?

Just like in previous test requirements, you need to go through all these criteria to be eligible to discharge. You need to show how you try to reduce the costs by cutting wasteful expenses. The more luxuriate stuff you have; the less your chances are to get the discharge. So, be careful about that. 

The Totality of Circumstances Test

It is the fairest eligibility assessment among all the tests because by employing the Totality of Circumstances, judges analyze things on a case by case basis. This test provides you with more chances of getting a student loan discharge. So, you need to find a court and file your case there in which the cases are tested with the totality of circumstances tests rather than Johnson or the Brunner test. We strongly recommend you to pursue Bankruptcy discharge proceeding on those courts. There are various aspects that this test evaluates. They are:

Student’s Resources (current, past, present)

The judges will look at:

  • how much money you are getting right now
  • how much you got in the past
  • and the estimation of how much you will be paid in the future. 

The results will show if you are still able to pay for student loan debt while maintaining a minimum standard of living.

Student’s reasonable Living Cost

This criterion can be applied according to the number of dependents that you have. The judges will calculate a reasonable estimate regarding the cost of your family and see if it will be possible for you to get the money to survive while paying for loan debt. 

The Duration

The duration of the hardship is significant for the results of the court. They will decide according to the answer to these questions. How much longer are you going to be financially insufficient to pay back the loan? Did you stop paying back because of temporary issues or not? Those issues may be unemployment or the downturn in the economy. Are you permanently disabled or have a severe injury that makes you unable to work? Do you owe a massive debt amount that you cannot pay back even for 100 years?

Good Faith Attempts

Have you tried to find a job that pays more? Are you pretending to save cash, or you just spend whatever you have? Did you try to cut the expenses which are not necessary? For example, are you drinking Starbucks coffee every day for $9? You need to prove that all the non-essential costs are caught, and you try to pay back the loan by all means. How can you prove that?

The working mechanism of this test is more or less like the previous ones. The decision about bankruptcy loan discharges will be made according to your past actions and future opportunities. If you searched for better jobs, cut all the unnecessary expenses from your daily life, but simply could not pay back the loan debt, then you may have a chance to get approval from the court. 

The Bryant Poverty Test for Bankruptcy Discharges

It is the most straightforward yet the hardest test among all. The strict considerations that these test offers are tough for students to pass. You need to be homeless, hungry, and even dead to get approval according to this test. The difference between The Bryant poverty test and the other is that, this one only determines the results according to the numbers. How do they calculate it?

The test asks you about the after-tax net income that you get and compare it with the federal poverty line. The only way to pass this test is to become the poorest member of the neighborhood. The national poverty line is deficient, that is why even the small amount of money that you may additionally get can negatively affect your chances of succeeding in getting a discharge. 

What do you need to consider?

Now that we have covered most of the details about bankruptcy loan discharge, let’s talk about some factors that you need to consider while applying for this program. It is essential to know all the core details about the case before you decide whether or not it is worth trying bankruptcy discharge or not. Besides the tests that can lower your chances at court, the university that you have studied plays a massive role in the case. So, the difficult part is not only about tests.

Things that show if you can get approval or not

  • If you studied in the university that the Department of Education did not mention in their website, you are eligible to take your chance on loan discharge
  • If your loan lender is one of the largest corporations in the nation like leading banks etc.
  • If your student loan debt is related to the study programs which are not offered in traditional four-year bachelor programs, for example, vocational education, coaching classes, technical training, beauty, barber, or cooking schools are listed in that category. This will surely increase your chances.
  • If you cannot get a full student loan discharge through bankruptcy, do not lose hope because there is still a chance that you may get partial discounts.

Apply for Student Loan Forgiveness Help

If you struggle with university student loan forgiveness, then you should get help with that. Because the employees in these agencies are dealing with the student loans every day and they have enough experience for solving different kinds of student loan problems.

If you are Eligible, What to do Next?

If you think that you are eligible to apply for bankruptcy discharge, you need to do the following. First of all, you need to file a petition which is called an “adversary proceeding.” This petition is written as it requests the court judgment, which is called a “determination.” This determination shows that you have the right to ask for loan discharge, and you deserve it. After filing this petition, you need to apply for the Undue Hardship rule to prove the court that you are financially insufficient to pay back the loan debt.

Which type of Bankruptcy Loan discharge do you need to pursue?

You need to know the differences between various bankruptcy discharge options so that you need to choose from them. It is better to hire a lawyer while you file an application about this matter. The lawyer will help you analyze your case and will assist you in finding the evidence to show the court. There are two types of bankruptcy, according to federal law. The first one is Chapter 7, and the second one is Chapter 13. Each one of them has advantages and disadvantages which you need to be aware of before selecting. 

What if your application gets denied?

If your application gets denied, depending on your selection of bankruptcy loan discharge, you will face various outcomes following your choice. It might cost you additional thousands of dollars if you made something wrong during the application process. Let’s look at some of the possibilities that can happen after you fail to satisfy judges and undue hardship tests. 

For Chapter 7 Bankruptcy- If you fail on bankruptcy petition on Chapter 7, it is terrible. That means you will spend your whole life with that student loan debt

For Chapter 13 Bankruptcy- If you fail on the petition, you may still be left with all that debt amount, but it is not harsh as the first one as you can use some alternatives for financial assistance. 

We recommend you to choose Chapter 13 for filing a petition because here you have at least another chance for getting rid of the debt. Though it is better to contact an attorney and according to your particular financial situation, he/she may give you more detailed information on why you need to choose Chapter 7 or 13. 

If you filed a BD petition for Chapter 13 but failed: What can you do afterward?

Do not be upset if you filed a Chapter 13 Bankruptcy Discharge, and the court did not accept your petition. You still have some options which can help you to get at least partial discounts or better payment rates.

After you fail to get approval, you can do these things:

  • Lower the monthly payment amount according to the amount that you mentioned on your petition
  • According to the longevity of the Chapter 13 plan, you can pay your monthly debt amount and save money
  • After the term of the Chapter 13 plan expires, you can file a petition again
  • The Debt collecting companies will not be able to bug you about payments while you are still using the Chapter 13 payment plan
  • This plan may help you to prioritize the debt amount that you file a Chapter 13 petition for over other student loans that you have

Can you raise a Defense in Bankruptcy?

You need to consult this case with a lawyer and attorney to get more information. Though we can tell you that it is possible, and the process is like applying for Borrower’s Defense to Repayment Program. In that case, it was about the dishonest acts perpetrated by the schools towards you. Of course, raising a defense in bankruptcy proceedings is not about fraudulent acts of schools. Though it is about the criminal acts that made you take the loan, if there is a breach of federal law in your particular case, you can always count on this option as a plan B.

How does it work?

You need to prove that someone convinced you to take the loan by making empty promises. So, you decided to go under debt. You need to convince the judges that this was the case. Tell them that you did not have the intention of taking the loan and live miserably with all the debt amount in the first place, if not for those deceitful acts. Fundamentally you argue that you have loads of debt amount in your account, you do not have money to repay, your life is at risk because of that debt, and you took it only because someone deceived you. It is not easy to prove these arguments, but if you tried student loan discharge and it fired backward, this is the only available option for you. 

Bankruptcy Closed vs. Discharged: When is your case over?

Some people think that by approval of the court, the bankruptcy loan discharge case is over. The bad news is that: it is not. The case will finalize when the court decides on the order or the final decree. You may have remaining issues with the loan lender after your bankruptcy discharge gets accepted. So, the best advice would be talking with bankruptcy trustees to learn the process moving forward.

Bankruptcy closed vs. discharged: The Differences

They are two different things that result in various outcomes. When the court decides to enter your petition to bankruptcy discharge, they commit it because they accept your liability to pay back the loan debt. In chapter 7 bankruptcy, you get a complete discharge in a few months. In Chapter 13, bankruptcy student loan discharge, you need to follow the payment plan that you mentioned beforehand until the court grants you with discharge. Even though you finished with the discharge process, the case remains until the court decides to enter a final decree on your petition.

Your responsibilities continue after discharge

It does not mean that you are free of every responsibility if you get the loan discharge. If the debtor has a comprehensive case with ongoing lawsuits, there is a possibility that the case may go on for several months or even years. The bankruptcy trustee needs to administer all the property of yours to the estate if you want to fix the issues quickly. Until the court makes its decision about the final decree, you need to contact the bankruptcy trustee when required.

That means you have to:

  • Appear at deposition or
  • Testify in a pending lawsuit
  • Provide additional documentation
  • Turn over assets to the bankruptcy trustee

When will it get complete?

If you have a simple Chapter 7 bankruptcy with no assets involved, the trustee will file a no-asset report to the court, and your case will get closed after that. Though, if you own nonexempt assets, the case may go longer than you expected. Until that property gets administered by the trustee, you will not be able to relax because the court case will go on.

Can the Bankruptcy Discharge case reopen?

There are three major parts to this issue. Who is involved? The first one is you- debtor, the second one is the creditor- and the third is the bankruptcy trustee. With the will of either one of them, the case can be reopened, and investigation can start again. If there was false information in the documents that you presented before, you might get into trouble. Hence, the creditor may ask the court to start the case again, and as a result, you may lose the student loan discharge. On the other hand, it is also beneficial for debtors because they can ask to reopen the case too. If you see that there are violations regarding the discharge, you can approach the court and ask them to reopen the case to fix the remaining issues.

Student Loan Bankruptcy Discharge vs. Dismissal

Whenever the debtor/student file for bankruptcy, the favorable results for them is always a student loan bankruptcy discharge. Whether it is Chapter 13 or Chapter 7, the result of the successful discharge will help the debtor to get rid of the debt amount forever. Unless you start the case again and ask courts to reopen it, the creditors cannot pursue you for debt payments. Dismissal is another way of closing the bankruptcy case. If the court dismisses the case of the debtor, the debtor is not getting a discharge. Dismissal can happen if the debtor voluntarily accepts it. Though it is not possible in all cases. For example, in Chapter 7 bankruptcy, you do not have the right to ask for a dismissal.

In what cases can the court dismiss your case?

  • If you did fraudulent acts
  • If you could not comply with the court results

In case if the court dismisses your petition, you will have to pay your debts as always and is responsible for the amount.

Alternative options

If you could not discharge your student loans in bankruptcy, do not lose hope. There are available options that you can give a shot at.  

What are those options?

Income-driven repayment plan

For students with federal student loans, an income-driven repayment plan is an excellent chance for debt relief. You can get much lower monthly repayment plans with this program. While you use this program, the loan servicer extends the term for repayment for like 20 to 25 years. According to your annual income, they create a flexible plan that you can pay your debts back. There are four Income-driven repayment types right now from which you can choose one and start the repayment process. They are:

  1. Pay As You Earn
  2. Income-Based Repayment
  3. Income Contingent Repayment
  4. Revised Pay as you earn

Every student or debtor may be qualified for at least one of these IDR plans per FSA. If your annual income is $0 and you are unemployed, you will be considered under the program. That is why this type of program is a better option than Bankruptcy Discharge unless you do not want to get rid of the debt bills forever. You can calculate your IDR plan repayment with estimation calculators for these programs on the web.

Forbearance and deferment

All federal student loans can be eligible for either one.

Deferment

You can put some of the federal loans on deferment. While the loans stay there, you will have the flexibility of not repaying for them until your financial situation stabilizes.

Forbearance

Up to one year, you can stop all the payments for debt amounts by using student loan forbearance.

You cannot do these actions while you have private student loans because private student loan lenders do not offer any of those options.

Student Loan Discharge through disability

If you get disabled, you have a chance to discharge the student loan debt without going through bankruptcy. People who have been permanently disabled as a result of some incidents can use this option as well. You can find more information on the official site of the Disability discharge program. 

Bottom Line

A bankruptcy discharge has rarely helped students in the past because of the complex rules and judges’ bias towards student defaulters. The percentages show that it is almost impossible to get a discharge for your federal student loans. Though, you will not lose anything by filing a petition and giving it a shot. Whatever the results will be, keep calm, and continue fighting for your rights.