Student loans make up a significant percentage of the debt carried by people in the United States. In fact, student loan debts are second only to mortgage loans in the categories of consumer debts, and they total more than $1.7 trillion. These debts can place a significant burden on many people, and due to interest charges, collection fees, or other costs, they can last throughout a person’s entire life. Unlike many other types of debt, student loans cannot currently be discharged through bankruptcy in most cases. However, this may soon change due to a new bill that was introduced in the U.S. Senate.

The FRESH START Through Bankruptcy Act of 2021

On August 3, 2021, Senator Dick Durbin (D-IL) and Senator John Cornyn (R-TX) introduced a bill that would allow debtors to discharge student loan debts through bankruptcy in certain cases. This bill would restore an option that was available to borrowers before bankruptcy laws were changed in 1998. Under this provision, federal student loan debts would become eligible to be discharged in a bankruptcy proceeding 10 years after the due date of the first loan payment. 

For student loans that have been due for under 10 years, or for private student loans made by non-governmental institutions, debts would be handled the same way they are currently, and they may only be discharged through bankruptcy if a borrower can demonstrate undue hardship. Proving undue hardship can be a difficult process, and borrowers will usually need to initiate a legal case known as an “adversary proceeding.” In these cases, borrowers will be required to provide extensive and invasive details about their finances to show that the requirement to pay student loans has caused significant financial difficulties and affected their ability to provide for their ongoing needs.

If you have significant debts, bankruptcy can offer a way out of this difficult situation. Chapter 7 bankruptcy may be the ideal choice for you, since it will allow you to complete the bankruptcy process quickly, usually within a few months. You may be required to surrender certain non-exempt assets, which will be liquidated to repay some of the debts you owe. Once the bankruptcy process is completed, any debts included in the bankruptcy will be discharged, and you will no longer be required to pay them, giving you the fresh financial start you need. However, to qualify for Chapter 7 bankruptcy, you must meet certain requirements, which are known as the “means test.”

Understanding the Chapter 7 Means Test

As the name of the means test implies, it is meant to determine whether you have the financial means to pay back some of the debts you owe. The means test has two parts, and you will need to fill out a separate form for each part:

• Form 122A-1: Statement of Your Current Monthly Income - On this form, you will list the average monthly income you earned from all sources over the past six months. In addition to the wages you earned through employment, including tips, commissions, bonuses, and overtime pay, you will also include any alimony or spousal support payments you receive, interest from savings, dividends from investments, royalties, income from a business or rental property that you own, unemployment benefits, and income from a pension or retirement savings account. If you are married, you will also need to list your spouse’s income, even if they will not be filing for bankruptcy with you. After totaling all forms of income, you will compare this amount with the median income in your state for the number of people in your household. In Florida, the median income for one person for 2021 is $53,182. If your income is less than the median income, you will qualify for Chapter 7 bankruptcy. Otherwise, you will need to complete the second part of the means test.

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There are many types of situations where a homeowner may find themselves struggling to make their ongoing mortgage payments, and in these cases, they may be concerned that they may lose their home through foreclosure. Financial difficulties may arise because of medical debts or other unexpected costs, or the loss of a job may affect a person’s ability to pay debts and other expenses. Homeowners in these situations may consider bankruptcy as a way to eliminate their debts and regain financial stability, but they will want to be sure to understand whether they will be able to avoid the loss of their home. Chapter 13 bankruptcy is often the best option in these cases, and one benefit that it may provide is the ability to eliminate a second or third mortgage on a home.

Lien Stripping in Chapter 13 Bankruptcy

The way debts are handled during a Chapter 13 bankruptcy will depend on whether they are secured or unsecured. Secured debts involve collateral that can be repossessed if a debtor defaults on their debts and these include most mortgages. However, if a homeowner owes more on their mortgage than their home is worth, any subsequent mortgages or a home equity line of credit may be considered unsecured debts.

In a Chapter 13 bankruptcy, a payment plan will be created in which the debtor will pay off as much of their unsecured debts as possible over a period of three to five years. The amount of the payments that the debtor will make during the plan will be based on their disposable income, meaning the amount that is left over after they pay their regular living expenses, as well as payments on a mortgage or any other debts that are not included in the repayment plan. Homeowners will be able to avoid the foreclosure of their home if they continue to make their mortgage payments, while also making all of the required payments in the Chapter 13 repayment plan. 

Most Americans have some form of debt. This may include credit card debts, auto loans, the mortgage on a home, or other amounts owed to a creditor. For those who are able to make ongoing payments, debts can be troublesome but manageable. However, families who experience financial difficulties may end up with too much debt to handle, and this can lead to ongoing issues such as harassment from creditors, a lower credit score, or the foreclosure of a home. Fortunately, bankruptcy can provide relief for people who are in these situations, and it may allow for the elimination of certain debts. Debtors will need to understand what types of debts can and cannot be discharged.

Non-Dischargeable Debts

Depending on a family’s financial situation and the assets they own, Chapter 7 bankruptcy may allow for the discharge of most debts after certain assets are liquidated, or Chapter 13 bankruptcy may allow debts to be consolidated into a repayment plan, with any remaining debts being discharged after the plan has been completed. However, even after completing the bankruptcy process, a debtor may be required to repay certain debts, including:

• Student loans - Most of the time, student loans provided through a government lender such as Sallie Mae, as well as private student loans that are backed by the federal government, cannot be discharged through bankruptcy. In some cases, a person may be able to have these loans eliminated by showing that repaying them would cause undue hardship, but few people are able to meet this requirement. Those who are unable to make student loan payments may be able to negotiate affordable repayment plans with creditors.

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If you have experienced financial difficulties and are struggling to pay the debts you owe while also covering your ongoing bills and expenses, it may seem like there is no end in sight to this situation. Extensive debts can be especially problematic if you are a homeowner, and if you have gotten behind on your mortgage payments, you may be facing the foreclosure of your home. However, it is important to understand that you have options that may allow you to avoid the loss of your home, including filing for bankruptcy. For many homeowners, Chapter 13 bankruptcy is the best option for debt relief, and by understanding how this process works, they can ensure that they will be able to continue to own their home.

Addressing Mortgage Payments and Other Debts in a Chapter 13 Bankruptcy

One of the key things to note about bankruptcy is that when a debtor files a bankruptcy petition, this will create an automatic stay that will require creditors to cease all collection activities. If a lender has initiated the foreclosure process, the automatic stay will put a stop to these actions, ensuring that a homeowner will not be forced out of their home. This can create “breathing room” for a debtor as they determine how to address their debts.

When a person files for Chapter 13 bankruptcy, they will propose a repayment plan in which they will pay off some of the debts they owe. This plan will last between three and five years, and once it is completed, any remaining unsecured debts that were included in the plan will be discharged, and the debtor will no longer be required to pay the amount owed.