Important Bankruptcy Considerations

The bankruptcy process is designed to be a tool for debt relief for those struggling with financial hardship. While the process is often the only saving grace for debt relief, it is important that you carefully consider your financial situation. Even if you are under the pressure of foreclosure threat, no good can come from jumping into bankruptcy without due consideration.

Deciding On Debt Relief

Filing for bankruptcy is a big decision, one that often comes with many questions. The reason you don’t want to rush into bankruptcy is simple; you can’t afford to make any mistakes. Even outside of bankruptcy rushing into a debt relief strategy can be detrimental to your success.

First, have you sat down and really examined your financial situation? It is important to gain an understanding of exactly how much you owe, what your disposable income level is like and whether you are at risk of losing assets due to delinquent payments. The answers to these questions will better help you identify the right debt relief strategy. If you have adequate disposable income, owe less than $10,000 or have no assets at risk of repossession, you may find an alternative to bankruptcy feasible. However, only a qualified bankruptcy attorney can help you determine if your situation is best served with the help of bankruptcy.

Second, choosing bankruptcy is not an option to take lightly. In other words, you will be required to participate in the process. You are responsible for gathering the necessary documentation, reporting the details of your financial affairs thoroughly and accurately, and completing a debtor’s education course. Misinformation in your filing petition, misrepresentations of your financial affairs like income or assets, or failing to complete the necessary requirements can lead to case dismissal. It is important that you take the time to prepare for your case before submitting your petition to the court.

Last, are you ready to get to work after your debts are discharged? Many people assume that once their debts are discharged their works is done. In reality, having your debts discharged in bankruptcy leaves you with a clean slate, but you are still going to need to work towards repairing the damage done to your credit from missed payments and delinquent account statuses. It is a good idea to have a credit repair game plan upon exiting bankruptcy. Know what you can afford to carry in a balance, keep your balances below 30 percent of the spending limit and make timely payments. Remember that the road to credit recovery takes time and effort. Only you hold the power in writing a new history of responsible credit use.

Student Loans and Bankruptcy

Student loan debt has become a serious problem in the United States. According to the Federal Reserve Bank of New York, approximately $85 billion in educational debt is past due. With so many in default on their loans, borrowers are looking for ways to repay or discharge their debt, and many are looking to bankruptcy as a solution.

The general rule is that student loans cannot be discharged in bankruptcy. However, there are exceptions to this rule. The Bankruptcy Code states that educational loans that are federally backed or where the funds originated from a non-profit agency are not discharged in bankruptcy. Private loans can be discharged but these types of loans are a small percentage of the educational loans given each year.

Debtors can discharge educational loans in Chapter 7 bankruptcy cases by claiming undue hardship in a separate lawsuit filed in the bankruptcy court. These lawsuits are called adversary proceedings. The definition of undue hardship is slightly different depending upon where the bankruptcy case is filed. Many courts follow the Brunner Test.

The Brunner Test is a three-part test for determining dischargability of this type of debt. First, the debtor must prove that repayment of his school loans would be an undue hardship on himself and his dependents. This means showing that the debtor cannot maintain a minimal standard of living while repaying any portion of the educational loans. Second, the debtor must prove that the circumstances that created the undue hardship are permanent and unlikely to change. Third, the debtor must show that he has made a good faith effort to repay the loans. Courts also consider whether the circumstances that created the undue hardship were present at the time the money was borrowed. Very few debtors meet the criteria necessary for discharging student loan debt in bankruptcy.

If student loans cannot be discharged then they have to be paid. Treatment of these claims is different depending upon whether the case is filed under Chapter 7 or Chapter 13. In Chapter 7 cases repayment of student loans is deferred during the bankruptcy case. Once the case is closed the lenders are free to begin collecting from the debtor. In Chapter 13 cases student loan creditors are treated as unsecured creditors. They receive payment only if the debtor's confirmed plan provides payment to the unsecured creditors as a class. However, if the student loans are not paid in the bankruptcy case then payment is simply deferred until the case is closed. During the case the debt continues to accrue interest, so the balance can be substantially larger when repayment begins after the bankruptcy case.