Can Student Loans Be Discharged in a Arizona Bankruptcy?

Student Loans in Bankruptcy

As an eager student looking forward to expanding your education, you may not have thought twice about borrowing through student loans as a wise investment in your future. You were ready to start a rewarding, satisfying career in a field where you expected a decent salary. Unfortunately, many college graduates find their employment opportunities are not as lucrative as they hoped, especially when facing challenges related to student loans in bankruptcy. In many cases, they struggle to find a position in their chosen area or will take a lower-paying job to make ends meet.

Regardless of whether you are experiencing financial difficulties, you know that the lender on your student loans will still expect monthly payments in full and on time. You might get some relief through extensions and forbearance, but the interest will accumulate to create financial problems down the road. If you cannot pay student loans, you might wonder whether you can discharge them in bankruptcy in Arizona. You are probably aware that it is possible to eliminate other debts, so it makes sense that student loans could be wiped out.

Therefore, it is reassuring to know that you can discharge student loan debt in bankruptcy. There is some confusion on the topic because it is challenging to remove the debt, but it is still possible in cases where the filer meets very strict criteria. You will need assistance from an Arizona bankruptcy lawyer to discharge student loan debt, and the following summary should convince you of the reasons why.

Statistics on Student Loan Debt in the US

Attending college is the dream for many young people, but the costs of secondary education have risen over the last few decades. Statistics from the Education Data Initiative indicate that a student pays $32,637 on average to attend a public university, and the costs for private institutions can be far higher. In sum, there are more than 43.6 million borrowers in the US carrying student loan debt, for a total of $1.766 trillion owed to both private lenders and the federal government.

Student loans turn into debt in a unique way since many arrangements allow you to borrow a certain amount without requiring you to begin payments until after graduation. There is even a grace period, so you might get another six months of additional time before you must pay monthly. During your college career, interest does not accrue with certain types of student loans. However, once you are obligated to pay, the interest and late fees will add up.

Summary of Chapter 7 Bankruptcy Rules in Arizona

Under Chapter 7 of the US Bankruptcy Code, filers can discharge certain types of debt and be free of the obligation to pay once the process is complete. The laws aim to protect the interests of creditors who are taking a financial hit after the debt is eliminated, so there is a liquidation component to Chapter 7. The bankruptcy trustee has the authority to sell your assets to pay creditors. However, keep in mind two points that work in your favor:

  1. There are exemptions that protect certain assets, including equity in your home, your vehicles, and designated personal property. These exemptions prevent the trustee from selling.
  1. In practice, the bankruptcy trustee may choose not to liquidate assets when doing so would be unproductive. Certain items may not bring a profit to pay a significant amount to creditors, or the selling process would be difficult.

Another factor to know when considering Chapter 7 bankruptcy is the strict rules to qualify. You are automatically eligible if your income is less than the state median. Some filers could also qualify under the Means Test, which considers important monthly bills.

How Chapter 13 Bankruptcy Works in Arizona

The final outcome for Chapter 13 bankruptcy is eliminating your debt, but the eligibility rules are relaxed with this type of case. To qualify, you must have a job that pays you a regular income. This is because the focus of Chapter 13 bankruptcy is a debt repayment plan. You enter into the plan to pay back creditors, so all debts are reorganized into one monthly payment that you can afford based on your income. In the end, you will wind up paying a percentage of the total amount you owe. Your debt repayment plan will last 3 to 5 years, depending upon your situation, and your debts will be wiped out when the case is over.

Chapter 13 is the option for individual bankruptcy filers who do not qualify under the income rules of Chapter 7. However, many people choose to go with Chapter 13 even if they are eligible. With this type of bankruptcy, there is no element of liquidation. The bankruptcy trustee cannot sell your assets, which is a crucial objective when you have considerable interests in real estate and personal property.

Treatment of Student Loans in Bankruptcy

With both Chapter 7 and Chapter 13, you can eliminate many forms of unsecured debt. Still, despite the fact that student loans are not secured by collateral, there are special rules. By default, your student loan debt would not be dischargeable, and you would still owe on the loan even after going through bankruptcy. There is a special process called an adversary proceeding that you must request to address student loan debt. Depending on the result of this proceeding, your student loan debt may be treated as follows:

  • With Chapter 7, your student loan debt would be considered the same as other debts. It can be discharged at the end of the case, but always be aware that your assets could be liquidated.
  • If you are unsuccessful with the adversary proceeding, your student loan debt will not be eliminated. You could get some relief by filing Chapter 13 because you can include these amounts in your debt repayment plan.

Hearings Before the US Bankruptcy Court

When you seek to wipe out student loan debt, you will request the court to go to the adversary proceeding on how the bankruptcy process applies. In this hearing, which is similar to a trial, you need to convince the judge that you are suffering from extreme hardship that prevents you from paying your student loans. The court will consider a variety of factors, including:

  • Whether you could afford to support yourself and your family if you were forced to pay, with poverty being the alternative;
  • The extent to which your financial situation will continue through the student loan repayment period, or if your circumstances might improve; and,
  • Any effort you have made in good faith to pay your student loans.

Other Types of Debt in Bankruptcy

Student loan debt is subject to special rules under the US Bankruptcy Code, but the laws are more general when applied to other types of debt. Chapter 7 and Chapter 13 are suited to discharge unsecured debts in which the lender or bank does not have an interest in collateral. Examples include credit cards, personal loans, medical debt, and lines of credit. 

You cannot eliminate secured loans in bankruptcy because the lender does have security rights. For instance, if you default on your mortgage, the bank may initiate foreclosure proceedings. When you do not stay current with an auto loan, the lender could repossess your vehicle.

In addition, note that there are some types of debt that cannot be discharged in any bankruptcy. You cannot wipe out obligations to pay alimony, child support, and certain court costs. It is also not possible to discharge debt from a personal injury lawsuit if you caused a DUI accident and injured someone.

Steps in a Bankruptcy Case

The adversary proceeding that is required to address student loan debt is a separate case from your bankruptcy matter, and you would typically request it shortly after filing. Fortunately, for Chapter 7 and Chapter 13, the legal process is somewhat similar. The steps include:

  • Complete the required credit counseling course within six months before you file.
  • Collect and organize financial documents.
  • Prepare the bankruptcy petition and schedules.
  • Create and submit your Chapter 13 debt repayment plan.
  • Attend the meeting of creditors, during which you will be asked about your finances and details on your petition.
  • Conclude the bankruptcy case and obtain the order for discharge.

Why You Need an Arizona Bankruptcy Lawyer

The overriding reason that legal help is critical for bankruptcy cases is that you will require advice and counsel to make informed decisions about your case. Your finances and future are at stake, and you cannot protect your interests if you do not have a legal background. Even before filing your case, you have an advocate to explain the laws, answer questions, and guide you with strategy.

It is also important to have an Arizona bankruptcy attorney to assist with the steps in bankruptcy as described above. Mistakes can lead to denying your petition or delays, during which time creditors could act against you.

When you seek to discharge student loan debt in bankruptcy, representation from a lawyer is critical. You must present evidence and arguments on your extreme financial hardship during the adversary proceeding, which can be challenging.

Set Up a Consultation with an Arizona Attorney Specializing in Student Loans in Bankruptcy

To learn more about discharging student loans and other debt through bankruptcy, please get in touch with DebtBusters at (866) 223-4395 or via our website. We can schedule a free consultation at our offices in Scottsdale, AZ. An Arizona bankruptcy lawyer will review your situation and advise you on opportunities to eliminate various types of debt through Chapter 7 and Chapter 13.

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