Student loan debts may permanently be canceled or discharged at the discretion of the lending institution. Yet, several laws have made student debt forgiveness very hard to receive in terms of discharging student loans through bankruptcy.
For instance, student loans are not automatically discharged under Chapter 7 and Chapter 13 bankruptcy categories if the debtor files for bankruptcy. The only way to get a student loan discharge under bankruptcy is to prove severe financial hardship.
On the other hand, if the lending institution does not act upon the debt promptly, the debt may sometimes be subject to an automatic discharge. Also, creditors cannot collect on debts while a bankruptcy proceeding is underway or is pending.
What Is a Chapter 7 Bankruptcy?
There are many different Chapters of bankruptcy that a debtor may file for, such as Chapter 7, Chapter 13, Chapter 9, and Chapter 11. The Chapter of bankruptcy that a debtor or entity chooses to file will hinge on the conditions provided by the U.S. Bankruptcy Code. For instance, only people are allowed to file for Chapter 13 bankruptcy. If a business is filing for bankruptcy, it will most likely file it as a Chapter 11 proceeding.
Chapter 7 is the most typical type of bankruptcy filing. It is ideal for debtors with low income, who have high amounts of unsecured debt, and need quick relief. Those who successfully file for Chapter 7 bankruptcy and obtain a discharge will be permanently released from having to pay their debts.
Thus, if you have racked up a lot of debt due to unpaid credit cards, medical bills, or student loans, you may want to consult a local bankruptcy attorney to determine whether filing for Chapter 7 bankruptcy is the right move for you. Often, bankruptcy is used as a last resort and comes with many consequences. A bankruptcy lawyer can advise you of all the associated dangers and benefits.
Who Qualifies for Chapter 7 Bankruptcy?
Only debtors who meet specific income criteria will be eligible to file for Chapter 7 bankruptcy. To qualify, the petitioner’s income must be equal to or fall below the median income in their state. This is known as the “bankruptcy means test.” Median incomes used in the means test can vary widely from state to state. Thus, it is important to review the income requirements of a particular state.
Suppose the petitioner’s income is above the median income requirement in their state. In that circumstance, a second test will be performed that measures their income against their essential monthly expenses (e.g., groceries, medications, etc.).
The court will use the means test and the essential expenses test to resolve whether the petitioner qualifies for Chapter 7 bankruptcy. Those who fail to qualify for Chapter 7 bankruptcy may still be eligible to file for Chapter 13 bankruptcy.
Aside from the income requirements, a petitioner filing for Chapter 7 bankruptcy must also have first attended credit counseling before filing, must not have endeavored to defraud creditors or the court, must not have had a debt discharged under Chapter 7 bankruptcy within the past eight years, and must meet a few other prerequisites.
Although filing for bankruptcy should normally be avoided, filing for Chapter 7 bankruptcy provides better benefits to debtors than those who file for Chapter 13 bankruptcy. For example, a debtor who successfully meets the requirements of a Chapter 7 bankruptcy filing can have their debts wholly discharged via a court order.
On the other hand, a debtor who files for Chapter 13 bankruptcy must repay their creditors following a three to five-year plan.
Further, unlike debtors who file for Chapter 13 bankruptcy, those who file for Chapter 7 bankruptcy can obtain immediate and permanent relief, will most likely get to keep the bulk of their property, and will not need to make a repayment plan since creditors will no longer be able to collect on the debt.
This also means that the debtor will be entitled to keep their future income instead of paying it back as part of their Chapter 13 repayment plan.
What Are the Consequences of Defaulting on a Student Loan?
Depending on who issued the loan and what the loan amount is, there can be several legal effects of defaulting on a student loan. The Department of Education or the lending institution itself may take the following actions to recover payment for the debt:
- Seize Income Tax Returns: this is the most standard way for creditors to obtain payments on loans.
- Wage Garnishment: The Department or lending agency can garnish a maximum of 15% of the debtor’s disposable income. This amount must also be no more than 30 times the minimum hourly wage.
- Revoke Federal Benefits: In some circumstances, up to 15% of federal benefits may be used to collect on debts. This is usually taken from Social Security benefits. Only $9,000 a year maximum can be used, however.
- Revoke the Debtor’s Professional License: Some jurisdictions may authorize the state to suspend, revoke, or decline to issue a professional license if the debtor has defaulted on a student loan. This can apply to professionals such as teachers, doctors, lawyers, and state agents.
- File a Civil Lawsuit: In limited instances, a civil lawsuit can be filed to collect on the student loans. The court may grant the creditor access to the debtor’s assets, such as property or bank account savings. There is no statute of limitations or deadline for the government to file such a lawsuit. Nevertheless, since the debtor is already in debt, a lawsuit is usually the last resort since the debtor lacks significant assets.
Can I Contest or Appeal Student Debt Collection Efforts?
Suppose the Department or lending agency utilizes any of the collection efforts listed above, such as seizing a tax refund. In that case, they will usually first send the debtor a notice that they will be initiating such measures. The notice will usually include the option to either repay the debt or appeal the tax refund seizure. If the debtor does not choose to appeal, then the tax refund may automatically go towards the debt repayment.
An appeal against a tax refund seizure, garnished wages, or other collection methods listed above may be based on the following grounds:
- The student loan has already been repaid.
- The loan has been deferred, is in forbearance, or was formerly canceled.
- The loan is currently being paid under a different repayment plan.
- The loan does not belong to the debtor.
- The loan was legally unenforceable due to fraud.
- The borrower has become incapacitated, disabled, or is deceased.
- The borrower’s school has closed (the student has not yet graduated)
- The borrower was mistakenly certified as eligible for the loan.
- The borrower is owed a refund by their school.
- The borrower has a pending bankruptcy claim, or the loan was discharged through other measures.
Thus, a student lender needs to be mindful of any conditions that may affect their current debt situation.
Do I Need a Lawyer for Disputes over Student Debt Cancellation?
Defaulting on a student loan can lead to several legal consequences, including possible exposure to a civil lawsuit. You may wish to consult with a bankruptcy lawyer if you are unsure of the status of your debt situation.
Also, it may be beneficial to employ an attorney if you will be challenging or appealing any collection efforts initiated against you. Your attorney will be able to present all your choices to you and direct you through the appeal process.