If you are considering a Nevada bankruptcy in order to crawl out from underneath a mountain of debt, you are not alone. Many Nevadans seeking a fresh financial start have turned to the protections of the bankruptcy code in order to get their financial life back on track. And while the types of debt that can be discharged through the bankruptcy process are nearly endless, there is one type that will typically stick with you even after you complete the bankruptcy process – student loans.
Many people understand that student loan debt will typically not be discharged during the course of your bankruptcy. But it is worth noting that in some circumstances, the court will agree to a discharge that wipes out your student loan obligations. To get a better understanding of how your student loan will be affected by declaring bankruptcy in Nevada, contact the experienced bankruptcy attorneys at Vohwinkel Law today.
What happens to student loan debt during bankruptcy?
Generally speaking, your student loan debt cannot be discharged through the bankruptcy courts. The theory behind this policy is that it is unfair to lenders, as you will keep the knowledge and degrees you earned using those loans but will have no obligation to repay the debts that made that education possible. However, the laws protecting student lenders have been criticized in recent years given the overwhelming amount of student loan debt many Americans face. While a discharge is possible in some cases, it is helpful to first understand how student loans are treated depending on the type of bankruptcy you file.
The purpose of a Chapter 13 bankruptcy is to reorganize your finances in a way that prepares you to meet your financial obligations after your bankruptcy case discharges. A Chapter 13 bankruptcy typically takes 5 years to complete and requires you to make a monthly payment to your creditors through the bankruptcy trustee. Your student loan debt will be classified as “nonpriority unsecured debt,” which means you may end up paying anywhere between your full student loan payment each month during your bankruptcy or potentially nothing at all. If the court determines making your student loan payments would be unfair to your other creditors, you could find yourself going years without making a payment on the debt. The bad news is that while your lender can't collect from you during the bankruptcy, you will accrue interest the whole time. Once your bankruptcy is completed, you will still be obligated to pay your student loan debt going forward.
In a Chapter 7 bankruptcy, the intent is for you to liquidate your available assets to pay what you can toward your debt before discharging your remaining obligations away. In Chapter 7 bankruptcy, there is no repayment plan, and the entire process can take less than a year. Because of the automatic stay of the bankruptcy code, you will not be required to make any loan payments during the course of your bankruptcy. But because the debt will not discharge, you will owe the full amount after your bankruptcy ends.
When is student loan debt dischargeable?
You will only be eligible for a bankruptcy discharge of your student loan debt if you face “undue hardship.” Only a fraction of all bankruptcy filers are granted such a discharge, and the requirements of proving undue hardship are unclear. However, courts generally consider three benchmarks:
- Have you made a good faith effort to repay the loan?
- Could you sustain a minimal standard of living if you repaid the loan?
- Will your financial hardship continue long-term?
Although most people find they are unable to discharge their student loans through bankruptcy, there are other options for paying down your student loans even if it seems impossible. Through a number of federal programs like the Pay as You Earn Plan, you may qualify for some form of loan forgiveness if you follow through with the program. These programs typically involve paying a percentage of your discretionary income each month for the course of 20 to 25 years. While this results in a substantial payment over several decades, for many borrowers it would not pay off student loans entirely. Under these programs, it is possible to have the remaining balance of your loans forgiven if you diligently make the payments each month.
How a Nevada Bankruptcy Attorney can Help
Do you have questions about how your student loans will be affected by bankruptcy? Contact Vohwinkel Law today for the answers.