In March 2012 a United States report showed that for the first time in history student loan debt in America had surpassed credit card debt. It was a startling, yet not completely unexpected figure. More people are going to college, college tuition is constantly on the rise, financial aid is readily available, and jobs are scarce after graduation. The average amount of student loan debt in the US today is nearly $27,000. How can an individual struggling to find a job ever find a way to pay off that massive amount of debt? Here’s how declaring bankruptcy may be the answer:
Student loans are typically placed into a category of debt that cannot be wiped away through the normal Chapter 7 bankruptcy rules. Although it is rare, there are some cases where student loan debt may be eligible to be erased if the debtor can prove that making their payments will cause them “undue hardship”. The bankruptcy court has various tests that they use to determine whether or not a hardship exists for the debtor. One of these tests is known as the Brunner test and requires showing that 1) the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for the debtor and the debtor’s dependents if forced to repay the student loans; 2) additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and 3) the debtor has made good faith efforts to repay the loans.
Chapter 13 bankruptcy rules are a little different when it comes to student loans. A Chapter 13 bankruptcy allows the debtor to “reorganize” their debts and pay them back through a court ordered 3-5 year repayment plan. This can be beneficial for many reasons, but one of the most important is that the student loan company can no longer set the monthly payment. The monthly payment for Chapter 13 plans are created and overseen by the bankruptcy trustee. The debtor simply mails a payment to his/her bankruptcy trustee each month for the duration of the plan and the trustee handles the disbursement. Another great thing about a Chapter 13 bankruptcy is that at the end of the 3-5 year repayment plan the debtor is not only debt free, but caught up on all secured payments like their mortgage, vehicle, and in our case student loans.
Claiming bankruptcy because of student loans is unfortunately becoming more common each year. Whether you are hiring a bankruptcy attorney or trying your hand at a do it yourself bankruptcy, remember that you must list all the debts in your name must be listed on your bankruptcy paperwork. Don’t get discouraged if you find out that your student loans cannot be erased with a bankruptcy, remember that after your case is completed you will be debt free otherwise and in a healthier financial state to make timely student loan payments. Doing this will help not only pay down your student loan debt, but help you rebuild your credit quickly after your bankruptcy is completed.
Within every section of the law there are subsections with different rules than the ones before.
The laws that govern bankruptcy are no different; there are separate chapters that can be filed and different rules for each chapter. The laws are sometimes so complex that certain attorneys only specify in one type of bankruptcy. If you are thinking about a hiring a bankruptcy attorney or even filing a do it yourself bankruptcy it is typical that you will be faced with sifting through information about the different types of bankruptcy. Here is some helpful information that highlights some of the differences between the various types of personal and and business bankruptcy:
1. Chapter 7 bankruptcy – This is the most common type of personal bankruptcy filed by either individuals or married couples. Businesses do not have the option to file Chapter 7 bankruptcy. In most cases Chapter 7 bankruptcy forms are used to erase large amounts of unsecured debt such as credit card debt and medical bills. It is typically beneficial for individuals or married couples that have little or no assets that could potentially be liquidated by the bankruptcy court in order to pay off some of their creditors.
2. Chapter 13 bankruptcy – This is the second type of personal bankruptcy available to individuals or married couples. Businesses also do not have the option to file Chapter 13 bankruptcy. In most cases filing the necessary Chapter 13 bankruptcy forms allows the debtor to take part in a 3-5 year repayment plan that encompasses a percentage of their overall unsecured debt. The percentage of debt involved in a Chapter 13 repayment plan can range from 10%-100% and is calculated by using the debtors disposable monthly income.
3. Chapter 11 bankruptcy – This type of bankruptcy is for businesses only and works similarly to how a Chapter 13 bankruptcy works for individuals. The bankruptcy court allows businesses to “reorganize” their debt and set up a payment plan that works for the business and its creditors. The repayment plans in both Chapter 11 and Chapter 13 bankruptcies are overseen by a bankruptcy trustee that makes sure payments are made on time and are correctly given to the creditors.
Typically, attorneys utilize the bankruptcy means test to determine the chapter of bankruptcy would best suit your needs. If you own your own business and feel as though a Chapter 11 business bankruptcy would benefit you it may be in your best interest to contact an attorney that specializes in that area. Filing a business bankruptcy does not necessarily mean that your business doors will be shut forever; in fact business bankruptcies aim to get finances back in order so that the business can not only stay open, but continue to grow. Filing a business bankruptcy does not mean that you must file a personal chapter of bankruptcy too, and if you are unsure about why or why not you should.
The legal document submitted to the court when a bankruptcy is filed is called a “petition.” When all is said and done a petition can range anywhere from 10-200 pages depending on the debtor’s specific situation. Some information on the petition is self-explanatory such as name, address, and social security number, but the majority of the document requires specific financial information that can only be provided by the debtor. Here are a few key items that you may need to supply to the bankruptcy attorney who is filing your case:
1. Pay Stubs – In most cases your bankruptcy lawyer will request copies of your pay stubs from you in order to accurately calculate your total income. This information is used to determine which Chapter of bankruptcy you will qualify for. If your income is below your state’s median then you may be eligible to file a Chapter 7 bankruptcy, but if your income exceeds the state median it may be best for you to file a Chapter 13. In some states you may be required to submit your spouse’s pay stubs even if they are not filing with you so that the “household” income is correct.
2. Tax Returns – Another financial document requested by many bankruptcy attorneys is prior tax returns. Depending on the chapter of bankruptcy that you file you may be asked to supply 3-5 years’ worth of returns. The information on your tax returns will be used so that the bankruptcy court has the exact figure of your gross wages as well as any miscellaneous income you have obtained throughout the years. If you have questions about how your potential tax refund may be affected by your bankruptcy you should consult with your attorney.
3. Mortgage Statements – If you are a homeowner filing bankruptcy it is likely that you will be asked to supply a copy of your most recent mortgage statement showing your current balance. This information is used by your attorney as well as the bankruptcy court to identify the amount of equity in your home. Equity is calculated by subtracting the balance of your mortgage from the Fair Market Value of your home. Equity in your home is protected by specific state bankruptcy rules called “exemptions” so this figure is extremely important.
This may make it seem like documents will be piling up as soon as you decide to file for bankruptcy, but it really isn’t all that bad. In most cases an organized bankruptcy lawyer will give you a concise list of documents you need to make the paperwork seem minimal. If you are unsure about where to find a certain document that is being requested of you just ask your attorney or someone in your attorney’s office. Shuffling through papers is just a small part of the bankruptcy process and it is well worth it. Once you hand the correct documents to your bankruptcy lawyer they will place the information into your petition and you will be on your way to a debt free life.