Bankruptcy maybe a humungous problem to individuals suffering from financial distress, most especially those who are trapped because of their student loans. The USA today faced a student loan debt at the record level and some members of the communities begun to ask if there was a possibility of bankruptcy. This blog article plans to shed light upon whether bankruptcy liquidates student loans or not by concentrating on Chapter 7 bankruptcy first and then showing the disadvantages derived from it for the borrowers.
Understanding Chapter 7 Bankruptcy:
Chapter 7 bankruptcy, the so-called liquidation bankruptcy under the law, normally consists of the sale of a debtor’s nonexempt properties to pay creditors. It makes it possible for debtors to start from scratch as it discharges such debts letting the individuals make a triumphant step out from the financial difficulties. Whereas, all the debt is not eliminated under Chapter 7 and treatment of Student Loans is very difficult to handle.
Treatment of Student Loans in Chapter 7: Absolutely contrary to usual opinion, debt-discharge of student loans through Chapter 7 bankruptcy is tremendously difficult. There is no federal government directive that makes it happen but instead imposes very severe requirements for the discharge of educational debt, thus as a condition, debtors have to demonstrate an undue hardship by a separate legal process called adversary proceeding. Financial hardship must therefore be proved through showing that failure to repay the student loans would cause the debtor to barely be able to make ends meet and thus, the living standards to be lowered.
Undue Hardship Standard:
The undue hardship standard differs in accordance to their location, but generally, when examining the Brunner test, debtors’ conditions are decided to be undue hardships. This test evaluates three criteria:
1. The borrowing subject can not afford a minimum of normal expenses and living as low income cannot pay the debt.
2. Carrying the burden of the debt could last throughout the repayment period that would be substantial to the income.
3. The debtor has still managed to repay the loans despite his or her financial struggle.
Challenges in Proving Undue Hardship:
To meet the definition of undue hardship, (which) sometimes is very high, debtors often have to demonstrate their hardship with a convincing argument. A lot of different courts are using their own standard in the way they judge, making it harder for creditors to gain discharge from the responsibility. In addition, the legal fees involved in pursuing a defensive proceeding to collect debts further discourage those in need from attaining relief.
Consequences of Failing to Discharge Student Loans:
Specifically, this group of borrowers who were preventing from obtaining debt discharge in Chapter 7 bankruptcy will encounter a loan deferral temporarily that is uninfluenced automatic stay. This implies that creditors should not undertake collection activities during bankruptcy on-goings but can start that once the case terminates. Hence, bankruptcy may not effectively eliminate wage garnishment, asset seizure and other post-bankruptcy collections.
Alternative Options for Managing Student Loan Debt:
Although Chapter 7 bankruptcy does not explicitly provide a solution for student loan debts, there are other alternatives for loan borrowers to work their re payments. The federal government provides an array of income-driven repayment plans, loan consolidation, and loan forgiveness programs that prove to be a life-saver to financially afflicted borrowers.
Conclusion:
To sum up, this idea of bankruptcy erasing any student loans seems to be partially true as well, at least in terms of Chapter 7 filings. The process of repaying education debt is going through a very strict test for related financial hardship which presumes major difficulties for debtors. As bankruptcy may help in detaching from some type of debts, student loan borrowers have to consider the other possible repayment arrangements and seek advice if required to decide for their financial future in the most informed way.
