Student Loan Arrearages—Chapter 7 or Chapter 13?

Loan ArrearagesSuppose that you’re struggling to meet your obligations and the bulk of your debt is tied to student loan repayments. You’re not alone. Statistics indicate that more than 44 million debtors owe over $1.5 trillion in student loan debt, and that that average total amount of debt for graduates of the class of 2018 was $29,800, with many former students carrying twice that much debt.

The American bankruptcy laws were established to help people get a fresh start. Does that apply when most of your debt is a result of your education? The answer, unfortunately, is somewhat complicated.

The General Rule Regarding Student Loan Debt

As a general rule, student loan obligations may not be discharged in a Chapter 7 filing. Debtors may, however, attempt to renegotiate or restructure student loan payments under a Chapter 13 debtor’s reorganization. In this type of proceeding, your student loan arrearages are considered “non-priority unsecured debt,” much like credit card and medical bills. In the Chapter 13 proceeding, your student loan creditors will be required to accept a pro-rata share of the amount you have available to pay all creditors. It’s important to note, though, that when the 3-to-5 year period of the Chapter 13 ends, you may still owe a remaining balance on student loan debt.

Filing for a Hardship Exception

The bankruptcy laws do allow you to discharge student loan debt under very limited circumstances, where you can show that you would incur an undue hardship if you have to repay your student loans. Typically, the bankruptcy courts allow this type of discharge only if you can show that you would not be able to maintain a minimal standard of living for you and/or your family if you have to repay the debt. You must also show that you’ve made a good faith effort to repay the debt and that your current financial condition is likely to continue for the duration of the repayment period.

Contact Heath, TX Bankruptcy Attorney Carrie Weir

I provide a free initial consultation to anyone with questions or concerns regarding a bankruptcy filing. Contact my office by e-mail or call me at 972-772-3083 for a private meeting. With offices in Rockwall, Texas, I represent clients in Heath, Greenville, Lavon, Wylie, Mesquite and Rowlett.

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