Bankruptcy And Student Loans
It is notoriously difficult to discharge student loans through bankruptcy. The court requires you to prove that repaying your loans would cause you “undue hardship.”
The standard for what constitutes undue hardship is set very high. It is rare for Maryland courts to approve student loan debt forgiveness. Lenders and the court typically push borrowers toward deferment, forbearance, loan consolidation or restructured payment plans. If it is difficult for you to afford your student loans, it is best to act as soon as possible. Fees and penalties for late or missed payments add up quickly.
As a bankruptcy lawyer for nearly four decades, I have seen student loans become more and more of a problem for people in recent years. The amount of student debt carried in the U.S. is now measured in trillions of dollars and is the number-one reason why people are turned down for mortgages.
Putting Student Loan Payments On Hold
If your income makes it impossible to make monthly student loan payments, a temporary deferment or forbearance might be a solution to consider. A loan deferment allows you to temporarily put a halt to payments while the government pays your interest.
When you temporarily halt payments with a forbearance, the interest on your loans continues to accrue and adds to your balance. A deferment or forbearance will give you time to settle other debts and create a plan for paying your loans in the future.
Eliminating Student Loan Payments
To get your student loan debt discharged through bankruptcy, Maryland courts require you to pass the Brunner Test, requiring you to prove three things:
- Your current earnings and expenses show that you are unable to make payments without reducing your standard of living.
- You have been making a good faith effort to repay your loans.
- Your financial situation is unlikely to change for the duration of your repayment period.
Although there is a case moving through the courts that may change the student-loan/bankruptcy landscape, the courts are currently holding borrowers to very high standards in applying the Brunner Test.
Consequences Of Defaulting On A Student Loan
If you default on your student loans, the Department of Education can take steps to collect the debt, often without obtaining a court judgment. These actions may include:
Seizing your tax refund. You will receive a notice of the lender’s intent to seize your tax refund, but unless you file an appeal, the IRS will automatically apply the funds to your unpaid balance.
Garnishing your paycheck. The Department of Education can garnish up to 30 percent of your disposable income without getting a court order.
Garnishing your federal benefits. Only Supplemental Security Income (SSI) is off limits to the Department of Education. Both Social Security retirement benefits and Social Security Disability benefits may be garnished to pay student loans.
The Department of Education may sue you. There is no statute of limitations on student loans, allowing the agency to place liens on your property and access your bank accounts.
If you are struggling with student debt, I can help you resolve delinquencies, negotiate with your lender and represent you in court if necessary.
Contact Attorney John C. Hanrahan
We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.