When your finances are out of control, bankruptcy becomes a viable option. Chapter 7 bankruptcy represents a total discharge of your debt, while Chapter 13 provides relief through a court-approved repayment plan.
An attorney can help you evaluate pre- and post-bankruptcy options as well as determine if there has been fraud on the part of the lender or if there was no educational or economic benefit conveyed by attending college and accumulating large amounts of debt.
The 2005 Bankruptcy Abuse Prevention and Consumer Protection Act bankruptcy requires that you attend an approved credit counseling course up to six months before you file for bankruptcy known as ‘pre-bankruptcy’ counseling.
There is also a second counseling requirement: After most of your paperwork has been completed (but before your final discharge), you are required to attend a ‘personal financial management course’ which has also been approved by the Executive Office of the U.S. Trustee.
Approved agencies under the National Foundation for Credit Counseling have provided free credit counseling (the first requirement) to households with income that is less than 150% of the poverty line.
Student loan bankruptcy generally requires adherence to the Brunner Test, which is made up of three ‘prongs’:
First, the debtor’s current income and expenses are evaluated in terms of maintaining a minimal standard of living.
Second, additional circumstances are evaluated in terms of whether or not the situation has been (and will remain) hopeless.
Third, the debtor must have made a good faith effort to find and keep the best job possible as well as to minimize personal living expenses. A willful effort to cause the default does not meet this standard. Debtors should have attempted to qualify for income-based and income-contingent repayment plans and facts would generally have to be presented in your case to show your rationale for not enrolling in such programs, such as the accrual of large amounts of interest or that participation would force a drop in your standard of living or that you did not qualify at all.
Bankruptcy on HEAL Loans cannot be declared during the first seven years of repayment and, afterwards, a court would have to feel that it was otherwise unconscionable not to allow it.