An Unexpected Benefit of Chapter 7: Permanently Stop Student Loan Collections in Ohio.
Filing for Bankruptcy can be a complicated and daunting procedure. When a person attempts to take this task on without consulting with a professional, they may miss out on all the benefits that filing Chapter 7 can offer them including those that have to do with student loan collections.
Fitting the criteria for student loan discharge
Professional counsel will be experienced in criteria that a person must meet for student loan discharge. The standard for discharging student loans in bankruptcy is known as the Brunner Test. The Brunner Test requires a debtor to prove that they cannot maintain a minimum standard of living if forced to repay the loans, causing ‘undue hardship” for the Debtor, and that this condition is likely to persist for the foreseeable future. Additionally, the debtor must have made a good faith effort to repay the debt up to the point of attempting to file for bankruptcy.
The Benefit of the Automatic Stay
Once a Chapter 7 filing is submitted, a student’s debt will be put on hold due to the automatic stay. Under Chapter 7 of the bankruptcy code, the bankruptcy filing will cease “any act to college, assess, or recover a claim…” This puts the power in the student’s hands as opposed to the creditor and their collection agency whose job it is to pursue a debtor until they agree to some form of payment. This can include the power to garnish wages, as well as, offset tax refunds and social security benefits.
The automatic stay remains in place through the entire Chapter 7 proceedings beginning with the administrative filing of the bankruptcy petition through the end of the case. A typical chapter 7 case usually takes 4-5 months to reach its conclusion.
The Chapter 7 process
Once a student meets with legal counsel, the initial discussion is to prove undue financial hardship which would then call for an adversary proceeding to take place. This is when a student files a separate complaint against the lender during the pendency of the chapter 7. If the case proceeds to trial and the judge agrees that “undue hardship’ has been proven, then any student debt would be discharged.
Some judges will agree that there is some financial hardship but not enough to warrant a dismissal of all student debt. This is referred to as a partial discharge. At this time, the student will sit down with their lawyer and the creditor to discuss repayment arrangements and any penalties that would be incurred for missing payments and defaulting on the outstanding loan.
If there is found to be no undue financial hardship for any student loans to be discharged, the upside is that all other debts can still be dismissed. This would give anyone a greater ability to pay off their student loan debt without having financial difficulties in doing so.