What is the difference between Chapter 7 and Chapter 13 bankruptcy?
Chapter 7 Bankruptcy:
Process: Chapter 7 bankruptcy is often referred to as the “liquidation chapter” because it involves the liquidation of a debtor’s non-exempt assets to repay creditors. A bankruptcy trustee is appointed to oversee the process. Identifying exempt vs. non-exempt property prior to filing your case is extremely important and impactful to the outcome.
Eligibility: Individuals and businesses can file for Chapter 7 bankruptcy but there are certain income and asset limitations. Individuals must pass the means test, which evaluates their income and expenses to determine eligibility. Exemptions are the mechanism used to protect assets in a bankruptcy case and, if done incorrectly, can have a very negative and detrimental effect your ability to keep assets. Your best option is to speak with an experienced bankruptcy attorney.
Debt Discharge: In Chapter 7 most unsecured debts, such as credit card debt and medical bills, can be discharged, meaning the debtor is no longer legally obligated to repay them. However, certain debts, such as student loans and tax obligations, are usually not dischargeable but there are exceptions. Discharge is another area where speaking with an experienced bankruptcy attorney is helpful.
Repayment: There is no repayment plan in Chapter 7 bankruptcy. Once the non-exempt assets (if any) are liquidated, the proceeds are distributed among the creditors on a pro rata basis, the Chapter 7 Trustee collects fees and expenses from the non-exempt proceeds, and the remaining eligible debts are discharged. Although rare, if there is a surplus it will be returned to the debtor.
Chapter 13 Bankruptcy:
Process: Chapter 13 bankruptcy is also known as “plan of reorganization ” because it involves the creation of a repayment plan to pay off all or a portion of the debts over a three to five-year period as determined by the means test. The debtor retains their assets and makes monthly payments to a bankruptcy trustee who will pay creditors as dictated in the plan.
Eligibility: Only individuals, not businesses, can file for Chapter 13 bankruptcy. There are certain debt limits and income requirements to qualify. It is often chosen by individuals with a regular income who want to keep their assets and catch up on missed payments.
Debt Repayment: In Chapter 13, the debtor proposes a repayment plan to the court, outlining how they will repay their debts over the designated period. The plan usually prioritizes secured debts, such as mortgages or car loans, and can also include arrearages on missed payments. Priority unsecured creditors are determined by the bankruptcy code and will be repaid similar to secured creditors. Unsecured debts are typically repaid only in part, often at a reduced rate and no interest.
Debt Discharge: Upon successful completion of the repayment plan, any remaining eligible unsecured debts may be discharged, even if they were not paid in full. This provides the debtor with a fresh start while having fulfilled their repayment obligations.
It’s important to note that bankruptcy laws can vary, and the specific details and procedures may differ depending on the jurisdiction in which the bankruptcy is filed. Outcomes can vary even inside the same state. Consulting with a bankruptcy attorney or legal professional would provide the most accurate and up-to-date information based on your specific circumstances.
How do I know which chapter of bankruptcy is right for me?
Determining which chapter of bankruptcy is right for you depends on various factors, including your financial situation, goals, and eligibility. Here are some considerations to help you make an informed decision:
Financial Situation: Evaluate your income, expenses, and debts. Consider the types of debts you have, such as secured debts (e.g., mortgage, car loan) and unsecured debts (e.g., credit cards, medical bills). Assess your ability to repay your debts and whether you have significant non-exempt assets that could be at risk in a Chapter 7 bankruptcy.
Eligibility: Determine your eligibility for each chapter. Chapter 7 has income and asset limitations, while Chapter 13 requires a regular income to propose a repayment plan.
Goals: Consider your objectives for filing bankruptcy. If your primary goal is to eliminate your debts quickly and start fresh, Chapter 7 may be suitable. If you want to protect assets or catch up on missed payments while retaining ownership, Chapter 13 may be more appropriate.
Asset Protection: Assess the value and exemptions available for your assets. Chapter 7 involves liquidating non-exempt assets, while Chapter 13 allows you to retain them by repaying a portion of your debts.
Repayment Ability: Evaluate your ability to make monthly payments. Chapter 13 involves a repayment plan, which may be beneficial if you have a regular income and can afford the payments.
Debt Discharge: Understand which types of debts can be discharged in each chapter. Some debts, such as student loans and tax obligations, are usually not dischargeable in either chapter.
Legal Advice: Consult with a bankruptcy attorney. They can assess your specific circumstances, explain the implications of each chapter, and provide guidance tailored to your situation.
Ultimately, the decision on which chapter of bankruptcy is right for you depends on a careful analysis of your financial situation and goals. Seeking professional advice from a bankruptcy attorney is highly recommended to ensure you make the best decision based on your individual circumstances.
What debts can be discharged through Chapter 7 bankruptcy?
In Chapter 7 bankruptcy, most types of unsecured debts can be discharged, meaning you are no longer legally obligated to repay them. Here are common examples of debts that can be discharged in Chapter 7:
Credit Card Debt: This includes outstanding balances on credit cards and store credit cards.
Medical Bills: Debts resulting from medical treatments, hospital stays, and other healthcare services.
Personal Loans: Unsecured loans obtained from friends, family, or financial institutions.
Past-due Utility Bills: Unpaid utility bills, such as electricity, water, or gas bills.
Payday Loans: Short-term loans with high interest rates that are typically due on the borrower’s next payday.
Collection Agency Accounts: Debts that have been sold to collection agencies.
Broken Leases: Debts arising from the termination of a lease agreement, such as unpaid rent or lease.
Civil Court Judgments (Non-Fraudulent): Debts resulting from non-fraudulent civil court judgments, excluding certain types of judgments, such as those related to fraud or intentional harm.
Overdue Cell Phone Bills: Unpaid charges and fees from cell phone service providers.
It’s important to note that not all debts can be discharged through Chapter 7 bankruptcy. Some common types of non-dischargeable debts include:
Student Loans: In most cases, student loans are not dischargeable unless you can demonstrate undue hardship, which is challenging to prove.
Tax Debts: Generally, income tax debts, property tax debts, and other tax-related obligations are not dischargeable, except in certain limited circumstances.
Child Support and Alimony: Debts owed for child support or alimony cannot be discharged through bankruptcy.
Government Fines and Penalties: Debts resulting from fines, penalties, or restitution ordered by government entities are typically non-dischargeable.
Debts from Fraud or Intentional Wrongdoing: Debts incurred through fraud, embezzlement, or intentional harm to others are generally not dischargeable.
It’s crucial to consult with a bankruptcy attorney for precise information regarding your specific debts and eligibility for discharge under Chapter 7 bankruptcy. They can provide tailored advice based on your circumstances and the applicable bankruptcy laws in your jurisdiction.
What debts cannot be discharged through Chapter 7 bankruptcy?
While Chapter 7 bankruptcy provides debt relief by discharging many types of debts, certain debts are generally not dischargeable. Here are common examples of debts that cannot be discharged through Chapter 7:
Student Loans: In most cases, student loans, whether federal or private, are not dischargeable in bankruptcy unless you can prove undue hardship, which is typically difficult to establish. Further, in most cases, attempting to discharge student loans will typically require litigation to get a court determination.
Tax Debts: Income tax debts, property tax debts, and other tax obligations are generally not dischargeable, except in specific circumstances. For example, if the tax debt meets specific criteria, such as being more than three years old, it may be eligible for discharge.
Child Support and Alimony: Debts owed for child support or alimony are non-dischargeable. Bankruptcy does not release you from these obligations.
Government Fines and Penalties: Debts resulting from fines, penalties, or restitution ordered by government entities, such as traffic tickets or criminal restitution, are generally not dischargeable.
Debts from Fraud or Intentional Wrongdoing: Debts incurred through fraud, embezzlement, larceny, or intentional harm to others are not dischargeable. This includes debts resulting from fraudulent use of credit cards or loans obtained through false pretenses.
Debts for Personal Injury or Death Caused by Intoxication: Debts arising from personal injury or death caused by the debtor’s operation of a vehicle while intoxicated cannot be discharged.
Certain Court Judgments: Certain types of court judgments cannot be discharged in Chapter 7 bankruptcy. For example, judgments related to fraud, willful and malicious conduct, or intentional injury are typically non-dischargeable.
Debts Not Listed in Bankruptcy Filing: If you fail to list a particular debt in your bankruptcy filing, it may not be discharged depending on your jurisdiction. It’s essential to provide accurate and complete information about your debts when filing for bankruptcy and speak with an experienced bankruptcy attorney on how to handle the situation.
It’s important to consult with a bankruptcy attorney to understand the specific debts that may not be dischargeable in your case. Bankruptcy laws can vary, and there may be exceptions and specific criteria that could impact the dischargeability of certain debts based on your jurisdiction and circumstances.
How does Chapter 13 bankruptcy work, and what are the benefits?
Chapter 13 bankruptcy, also known as consumer reorganization, is a form of bankruptcy available to individuals with regular income who want to reorganize their debts and develop a repayment plan. Unlike Chapter 7 bankruptcy, which involves the liquidation of assets to pay off debts, Chapter 13 allows debtors to retain their property while paying back creditors over a designated period of time, typically three to five years.
Here’s how Chapter 13 bankruptcy works:
Filing the petition: The debtor files a petition with the bankruptcy court, along with various schedules detailing their income, expenses, assets, and liabilities.
Creating a repayment plan: The debtor proposes a repayment plan, which outlines how they will repay their debts over the specified period. The plan will pay debts according to their classification priority vs. secured vs. unsecured.
Confirmation of the plan: The court reviews the proposed repayment plan to ensure it meets legal requirements and is feasible. Creditors and the Chapter 13 Trustee have the opportunity to object to the plan prior to confirmation and the bankruptcy judge will rule on that objection if it is not resolved between the parties.
Repayment period: Payments begin within 30 days after filing the case regardless of approval status of the plan. If the court approves the plan, the debtor makes regular payments to a bankruptcy trustee over the repayment period, typically monthly. The trustee then distributes these payments to creditors according to the plan.
Completion of the plan: Once the debtor completes all the required payments as per the repayment plan, they will receive a discharge of any remaining eligible debts. This discharge relieves the debtor from the obligation to repay those debts.
Now, let’s discuss the benefits of Chapter 13 bankruptcy:
Asset retention: One of the significant advantages of Chapter 13 is that it allows debtors to keep their property, such as a house or car, as long as they can make the required payments outlined in the plan. This can be particularly beneficial for individuals who want to protect their assets from liquidation.
Debt consolidation and repayment: Chapter 13 enables debtors to consolidate their debts into a manageable repayment plan. Instead of dealing with multiple creditors and varying interest rates, they can make a single monthly payment to the trustee, who then distributes the funds to creditors according to the plan. Debtors are still responsible for their own living expenses such as rent, utilities, and food.
Protection from foreclosure or repossession: If a debtor is behind on mortgage or car loan payments, filing for Chapter 13 bankruptcy can halt foreclosure or repossession proceedings. The debtor can include these missed payments in the repayment plan, allowing them to catch up over time and save their property. In Texas, even after a vehicle is repossessed, filing for bankruptcy within 10 days after the repossession will usually allow your attorney to have the vehicle returned.
Can I keep my house and car if I file for bankruptcy?
Whether you can keep your house and car if you file for bankruptcy depends on several factors, including the type of bankruptcy you file, the equity you have in your assets, exemptions, and your ability to continue making payments. Let’s explore the scenarios for both Chapter 7 and Chapter 13 bankruptcy:
Chapter 7 Bankruptcy:
In Chapter 7 bankruptcy, also known as liquidation bankruptcy, a trustee may sell your non-exempt assets to repay your creditors. However, you are allowed to exempt certain property up to certain limits. Exemptions vary drastically depending on state law so speaking with an experienced bankruptcy attorney will be invaluable.
Chapter 13 Bankruptcy:
Chapter 13 bankruptcy allows you to create a repayment plan to catch up on missed payments and repay your debts over a three to five-year period. As long as you can afford to make the required payments you can typically keep your house and car. In fact, Chapter 13 can be particularly beneficial if you’re behind on mortgage or car loan payments because it allows you to include those missed payments in the repayment plan and catch up over time.
It’s important to note that each state has its own specific exemption laws, which vary widely. Some states allow you to choose between federal bankruptcy exemptions and state-specific exemptions, while others require you to use only state exemptions. The exemption limits for your house and car may differ depending on where you live. Consulting with an experienced bankruptcy attorney who is knowledgeable about the laws in your area is crucial to understanding how bankruptcy will specifically affect your assets and what options are available to you.
What is the means test, and how does it determine eligibility for Chapter 7 bankruptcy?
The means test is a key component of Chapter 7 bankruptcy eligibility in the United States. It helps determine whether an individual’s or household’s income is low enough to qualify for Chapter 7 bankruptcy, which involves the discharge of qualifying debts through the liquidation of non-exempt assets. The means test aims to prevent abuse of the bankruptcy system by individuals who have the ability to repay their debts through Chapter 13 bankruptcy instead.
It’s important to note that the means test is a complex calculation with specific rules and allowable expenses that vary based on factors such as state, household size, zip code, and debt payments. Consulting with a bankruptcy attorney who is familiar with the means test and local bankruptcy laws is crucial to understanding how it applies to your situation and determining your eligibility for Chapter 7 bankruptcy.
Can I file for bankruptcy if I have filed in the past?
Yes, it is possible to file for bankruptcy again even if you have filed for bankruptcy in the past. However, the ability to receive a discharge of your debts in a subsequent bankruptcy case may depend on certain factors such as the type of bankruptcy you previously filed and the time elapsed between filings. Let’s explore the general guidelines for filing bankruptcy again:
Chapter 7 to Chapter 7: If you received a discharge in a previous Chapter 7 bankruptcy case, you must wait at least eight years from the filing date of the previous case before you can file for Chapter 7 bankruptcy again and receive another discharge.
Chapter 13 to Chapter 13: If you received a discharge in a prior Chapter 13 bankruptcy case, you typically must wait at least two years from the filing date of the previous case before filing for Chapter 13 bankruptcy again and receiving another discharge.
Chapter 7 to Chapter 13: If you previously received a discharge in a Chapter 7 bankruptcy case, you must wait at least four years from the filing date of the Chapter 7 case before you can file for Chapter 13 bankruptcy and receive a discharge. However, you may be eligible to file for Chapter 13 before four years have passed if you paid back a certain percentage of your unsecured debts in the Chapter 7 case.
Chapter 13 to Chapter 7: If you previously received a discharge in a Chapter 13 bankruptcy case, you must wait at least six years from the filing date of the Chapter 13 case before you can file for Chapter 7 bankruptcy and receive another discharge. However, there are certain exceptions and circumstances where you may be able to proceed with a Chapter 7 filing earlier.
It’s important to note that these time frames are general guidelines based on the bankruptcy code, but specific rules and restrictions may vary depending on your jurisdiction. Additionally, even if you are not eligible for a discharge in a subsequent bankruptcy case, filing for bankruptcy can still provide certain benefits, such as the automatic stay that halts collection actions.
It’s recommended to consult with a bankruptcy attorney who can review your individual circumstances, assess your eligibility, and guide you through the bankruptcy process based on the specific laws applicable in your jurisdiction.
What happens to my assets during bankruptcy proceedings?
The treatment of assets during bankruptcy proceedings depends on the type of bankruptcy you file, the value of your assets, and the applicable exemption laws. Here’s a general overview of how assets are handled in bankruptcy:
Chapter 7 Bankruptcy:
In Chapter 7 bankruptcy, a trustee is appointed to oversee the liquidation of non-exempt assets to repay your creditors. It is important to note that many debtors may not have any non-exempt property and, if so, he Trustee has nothing the sell and will notify the court and creditors the case has no recoverable assets. The trustee’s role is to sell the non-exempt assets and distribute the proceeds among your creditors. Again, it’s important to note that certain assets are exempt, meaning you can keep them up to certain specified limits.
Exemptions: Each state has its own set of exemption laws that outline the types and values of assets you can protect from liquidation in Chapter 7 bankruptcy. Common exemptions typically include a homestead exemption for your primary residence, exemptions for certain personal property like clothing and household goods, exemptions for a vehicle, retirement accounts, and more. The specific exemptions available to you depend on the laws of your state. If an asset is exempt, you can usually keep it as long as you continue to make any associated payments, such as mortgage or car loan payments.
Non-exempt assets: Assets that exceed the exemption limits or are not covered by exemptions may be subject to liquidation by the trustee. The proceeds from the sale of these assets are then distributed among your creditors.
Chapter 13 Bankruptcy:
In Chapter 13 bankruptcy, you typically keep all of your assets. Instead of liquidating assets, you propose a repayment plan to repay your debts over a three to five-year period. The value of your assets plays a role in determining the amount you need to repay to your unsecured creditors. If the value of your assets exceeds the allowed exemptions, you may be required to pay a portion of that value to your unsecured creditors over the course of the repayment plan.
It’s important to remember that bankruptcy laws and exemptions can vary by jurisdiction and even within the same state, so it’s crucial to consult with a bankruptcy attorney who is knowledgeable about the laws in your specific location. They can help you understand which of your assets may be at risk and provide guidance on maximizing exemptions to protect your property.
How long does the bankruptcy process typically take?
The duration of the bankruptcy process can vary depending on several factors, including the type of bankruptcy filed, the complexity of the case, and the efficiency of the bankruptcy court. Here’s a general timeline for the two most common types of bankruptcy:
Chapter 7 Bankruptcy:
Chapter 7 bankruptcy is typically a quicker process compared to Chapter 13. The main stages of a Chapter 7 bankruptcy process and their estimated timeframes are as follows:
Filing the bankruptcy petition: The initial step involves preparing and filing the bankruptcy petition, schedules, and other required documents. This can be completed within a few days to a couple of weeks, depending on the individual’s readiness and the attorney’s assistance.
Automatic stay and creditor notifications: Once the bankruptcy petition is filed, an automatic stay goes into effect, halting most collection actions by creditors. The court sends notifications to creditors, which generally takes a week or two.
Meeting of creditors (341 meeting): Approximately 30 to 45 days after filing, a meeting of creditors (also known as the 341 meeting) takes place. During this meeting, the debtor answers questions from the bankruptcy trustee and any creditors present. The meeting typically lasts around 5-10 minutes.
Asset liquidation (if applicable): If there are non-exempt assets to be liquidated, this stage will take additional time. The trustee will evaluate, sell, and distribute the proceeds to creditors. The timeline for this process can vary widely, ranging from a few weeks to several months, depending on the complexity of the assets and the efficiency of the trustee.
Discharge: Once the meeting of creditors, and a 60-day creditor objection period passes, a debtor is eligible for discharge. It is important to understand that if this is an asset case the discharge may be entered but the case cannot be closed until the Chapter 7 Trustee completes administering any non-exempt assets.
Overall, the Chapter 7 bankruptcy process can typically be completed within three to six months. However, it’s important to note that the specific timeline can vary based on individual circumstances and the workload of the bankruptcy court.
Chapter 13 Bankruptcy:
Chapter 13 bankruptcy involves a repayment plan spanning three to five years. The timeline for Chapter 13 bankruptcy is significantly longer due to the extended duration of the repayment plan. Here’s a general outline:
Filing the bankruptcy petition and repayment plan: Similar to Chapter 7, the initial filing of the bankruptcy petition and repayment plan typically takes a few days to a couple of weeks.
Meeting of creditors (341 meeting): Approximately 30 to 45 days after filing, the meeting of creditors takes place, similar to Chapter 7.
Confirmation of the repayment plan: After the meeting of creditors, the court holds a confirmation hearing to review and approve the proposed repayment plan. This hearing usually occurs a few months after filing.
Repayment period: Once the court confirms the repayment plan, the debtor begins making regular payments to the bankruptcy trustee according to the plan. The repayment period typically spans three to five years, depending on the approved duration as determined by the means test and debtor’s ability to repay.
Completion of the plan and discharge: Once all required plan payments have been made, the debtor receives a discharge of any remaining eligible debts. The discharge is typically granted shortly after the completion of the repayment plan, usually within a few weeks to a couple of months.
The Chapter 13 bankruptcy process can span from three to five years due to the repayment plan duration. It requires ongoing compliance with the repayment plan requirements throughout this period.
It’s important to keep in mind that the timelines provided are general estimates, and the specific duration of the bankruptcy process can vary depending on various factors. Consulting with a bankruptcy attorney who can evaluate your situation and provide personalized guidance is crucial for understanding the timeline specific to your case.
What is the role of a bankruptcy trustee, and what are their responsibilities?
A bankruptcy trustee plays a crucial role in both Chapter 7 and Chapter 13 bankruptcy cases. Their primary responsibility is to administer the bankruptcy estate, ensure the fair treatment of creditors, and oversee the bankruptcy process. Here’s an overview of the role and responsibilities of a bankruptcy trustee:
Chapter 7 Bankruptcy:
In Chapter 7 bankruptcy, the trustee is appointed by the court and takes control of the debtor’s non-exempt assets to sell them and distribute the proceeds to creditors. The trustee’s responsibilities include:
- Asset Evaluation: The trustee reviews the debtor’s assets, including property, investments, and personal belongings, to determine if any of them can be liquidated to generate funds for creditors. They evaluate the assets’ value and potential exemptions that may protect them from liquidation.
- Asset Liquidation: If non-exempt assets are identified, the trustee is responsible for selling those assets in a fair and efficient manner. The proceeds from the asset liquidation are used to repay creditors according to the priority established by bankruptcy laws.
- Creditor Meeting: The trustee conducts the meeting of creditors, also known as the 341 meeting. During this meeting, the trustee asks the debtor questions about their bankruptcy schedules, financial affairs, and assets. Creditors may also attend the meeting and ask questions regarding the case.
- Distribution of Funds: After the asset liquidation, if any, the trustee distributes the funds to creditors according to the priority order established by bankruptcy laws.
- Discharge: If there are no objecting creditors, and the Chapter 7 trustee finds there are no assets to sell, the Chapter 7 Trustee will file a no asset report and/or notice of no distribution and the court will enter a discharge in approximately 75 days after the Creditor Meeting.
Chapter 13 Bankruptcy:
In Chapter 13 bankruptcy, the role of the trustee differs slightly from Chapter 7. The responsibilities of a Chapter 13 trustee include:
- Plan Review: The trustee reviews the debtor’s proposed repayment plan to ensure it meets the requirements of the bankruptcy code. They assess the debtor’s income, expenses, and the feasibility of the proposed plan.
- Plan Administration: Once the court confirms the repayment plan, the trustee receives the debtor’s plan payments and distributes them to creditors according to the approved plan.
- Disbursement of Funds: The trustee disburses the funds received from the debtor to the creditors in accordance with the approved repayment plan.
- Monitor Compliance: Throughout the repayment period, the trustee monitors the debtor’s compliance with the repayment plan, ensuring that payments are made on time and any changes to the plan are appropriately filed with the court.
The bankruptcy trustee acts as an impartial administrator overseeing the bankruptcy case, protecting the rights of both debtors and creditors, and ensuring the proper administration of the bankruptcy estate. It’s important to note that while the trustee represents the interests of the creditors, they are not an advocate for the debtor nor the creditors. Their role is to administer the bankruptcy process in a fair and efficient manner.
United States Trustee
The United States Trustee is charged with the duty of overseeing the bankruptcy process and monitoring for abuse of the bankruptcy system. Typically, the United States Trustee reviews and monitors cases for possible “bad behavior” and may appear in an individual chapter 7 case to ask questions but rarely appears in a chapter 13.
What types of debts are considered priority debts in bankruptcy?
In bankruptcy, priority debts are a specific category of debts that receive special treatment in terms of repayment as outlined in the bankruptcy code. These debts are considered more important or have a higher priority for repayment compared to other debts. Priority debts are typically not dischargeable in bankruptcy, meaning they survive the bankruptcy process and must be paid in full or in part. The specific types of debts considered priority debts can vary depending on the bankruptcy chapter, but here are some common examples:
Domestic Support Obligations: Debts related to child support and spousal support (alimony) are given the highest priority in bankruptcy. These obligations must be paid in full and cannot be discharged in either Chapter 7 or Chapter 13 bankruptcy.
Certain Taxes: Some tax debts are considered priority debts, including certain income taxes, property taxes, and specific other types of tax obligations. The priority status depends on factors such as the age of the tax debt and the specific tax laws in place.
Certain Government Fines and Penalties: Fines and penalties owed to governmental entities, such as fines for traffic violations or penalties for violating certain laws or regulations, may be considered priority debts but there are many exceptions. Speaking with an experienced bankruptcy lawyer will be critical to understanding what priority debts survive the bankruptcy discharge.
- What happens to my student loans in bankruptcy?
Student loans are generally not dischargeable in bankruptcy, which means they are not typically eliminated or forgiven through the bankruptcy process. However, there are some exceptions and circumstances under which student loans may be discharged, although they are relatively rare and difficult to meet. Additionally, this area of law is currently volatile as the government’s stance in resisting discharge of student loans has softened. Here’s an overview of how student loans are treated in bankruptcy:
Chapter 7 Bankruptcy:
In Chapter 7 bankruptcy, student loans are generally non-dischargeable unless the debtor can demonstrate “undue hardship” through an adversary proceeding—a separate legal action within the bankruptcy case. To prove undue hardship, you must typically meet a stringent standard known as the Brunner test, which requires showing:
- You cannot maintain a minimal standard of living based on your current income and expenses.
- Your financial situation is likely to persist for a significant portion of the loan repayment period.
- You have made good faith efforts to repay the loans.
Meeting the undue hardship standard can be challenging, and the determination is made by the bankruptcy court on a case-by-case basis. For the duration of your bankruptcy case the student loans will be placed in a bankruptcy deferment. Upon entry of the discharge, you will need to contact your lender and make arrangements to resume payments and cure any unpaid amounts.
Chapter 13 Bankruptcy:
In Chapter 13 bankruptcy, student loans are generally treated as non-dischargeable debts, like in Chapter 7. However, Chapter 13 allows for the creation of a repayment plan that spans three to five years, which can help debtors manage their student loan obligations by incorporating them into the plan for partial or full payment depending on circumstances. The debtor makes regular payments to the bankruptcy trustee, who distributes those funds to creditors, including student loan lenders. This allows for more manageable payments and potentially a more affordable path to resolving the student loan debt.
It’s important to note that even if your student loans are not dischargeable, filing for bankruptcy can provide temporary relief through the automatic stay, which halts collection actions, including student loan collections, during the bankruptcy proceedings. This can provide you with some breathing room to address other financial issues. Similar to a chapter 7, student loans may be placed in a bankruptcy deferment for the duration of your plan although interest will continue to accrue and be capitalized and you will need to make arrangements to resume payments after your repayment plan is complete.