Does Chapter 7 Cover Student Loans in California?

Student Debt Statistics: California vs. National Average We usually hear about student debt in news articles and political debates. But for millions of families, the student debt crisis is not merely an argument unfolding on the television set – it is a real, immediate financial burden that creates constant pressure simply to stay afloat. Student loans create an extraordinarily heavy debt burden for millions of young people and their loved ones, sometimes forcing students to drop out, change schools, or take on second jobs. The problem is not getting better, either. On the contrary, our nation’s student debt burden – as of 2020, collectively, people owe more than $1.6 trillion. This amount is growing heavier every day. According to Experian, the average student loan obligation is $38,920. That means student loan debt is surpassed by only mortgage debt and home equity lines of credit. In fact, student loan debt saw the most significant increase of all types of consumer debt between 2019 and 2020. Students in California may have it especially tough. While the average student loan debt per capita in California is “only” $34,187, which is less than the national average of $38,920, the Institute for College Access and Success still ranks California among the nation’s top 20 states with the highest student loan debt. It is obvious that student debt poses a major financial problem for tens of millions of people, including many who attended college here in California. The question is, what can graduates and their families actually do about it? It’s one thing to call your representative – but what if you need financial relief now? Depending on your situation, Chapter 7 bankruptcy could provide the debt relief you need. Keep reading to find out how.

Eliminating Student Loans in Chapter 7 Bankruptcy Bankruptcy is a legal process that allows single people, married couples, and business owners to reduce, pay off, or eliminate their debts according to their financial ability. Most people who file bankruptcy in California use a type of bankruptcy known as “Chapter 7,” which is also called “straight” or “ordinary” bankruptcy. According to the United States Bankruptcy Court for the Eastern District of California, Chapter 7 cases accounted for more than 6,300 of the 8,500 bankruptcy filings in the court’s Sacramento courthouse last year. In other words, about 75% of the people who filed bankruptcy in Sacramento during 2016 chose Chapter 7 bankruptcy. Chapter 7 allows filers to wipe away many of their debts. Debts that can be erased in Chapter 7 bankruptcy are called “dischargeable debts.” Medical bills and credit card bills are key examples of dischargeable debts in Chapter 7. Student loans are usually non-dischargeable in Chapter 7 bankruptcy, which means that in most cases, they cannot be erased by bankruptcy. However, exceptions exist that may apply to your situation.

The Brunner Test If you can show that the debt is causing you undue (excessive) financial hardship by meeting certain standards under the “Brunner test,” the court may agree to discharge the debt and eliminate your student loan liability. To pass the Brunner test and discharge student loans in Chapter 7 bankruptcy, you must prove that:

1. Repaying your loans is preventing you from attaining a minimum standard of living for yourself and (where applicable) your dependents.

2. Your current financial circumstances are unlikely to change.

3. You have made sincere (“good faith”) efforts to pay back what you owe.

What is a Minimum Standard of Living? A California bankruptcy court will not discharge student loan debt if you can attain a minimum standard of living. This means that you are able to support yourself and your family, but your lifestyle cannot be extravagant. Your lifestyle must be very frugal, providing only the necessities of life. For example, the court would look at a gym membership, new clothes, or an expensive neighborhood as evidence that your lifestyle is above the minimum standard. When you are looking to discharge student loans, the court will also look at the income of everyone in your household to determine if your living situation meets the minimum standard. It is possible that your income is not enough to attain a minimum standard of living. However, if after factoring in your grandmother’s pension and spouse’s social security, your household income is more than you need to provide for the basic necessities, you will likely not be granted a discharge.

Your Financial Situation is Unlikely to Improve There are times when it is difficult to find work. If the country is in the midst of a recession or if you have been injured, it might be hard or impossible to find work. However, the economy is likely to change and, unless your medical condition is permanent, you will get better. If your current financial situation is likely to be temporary, the court will not entertain a discharge. The burden of proof is on you to prove that your current status will not improve over time. The undue hardship exception was put into place to help individuals who are experiencing extreme difficulties. For example, if you suffered a permanent disability in a car accident, the court would likely look favorably on your situation. However, the court rarely considers bad decisions or outcomes as grounds to eliminate student loan debt. For example, if someone went to law school but never sat for the bar exam, they will have difficulties if they cannot find a job that pays enough to cover their student loans. Nonetheless, the court does consider each case on its own merits, so there is no hard and fast rule.

Sincere Effort to Repay Your Loan You need to prove to the court that you made a good faith effort to repay your obligation. Typically, you can meet this requirement if you have evidence that you made payments for some time. For example, if you made payments for five or six years, the court would consider it a good faith effort. However, if you have been deferring your payments or constantly defaulting over the years, the court might not consider your effort sincere. Nonetheless, your circumstances may have never allowed for any payments. For instance, someone who was rendered a quadriplegic in a car accident days after graduation might never have had an opportunity to make a student loan payment.

Other Benefits of a Chapter 7 Bankruptcy You might not be able to discharge your student loan debt through a Chapter 7 bankruptcy. However, that does not mean filing for bankruptcy is not a valid option. If you are struggling with other bills, including credit card debt or other personal loans, you could find some relief by eliminating all your dischargeable debt. Many people have difficulty paying their student loans because they have other outstanding debts. If you discharge a significant portion of your other financial obligations, paying your monthly loan payment might become more manageable. Additionally, filing a Chapter 7 will provide you a short respite. While the bankruptcy is pending, your lenders will be prohibited from contacting you or taking legal action against you. Therefore, from the date of filing until you receive your discharge, you will get a break to regroup. This mental vacation from your financial obligations could help you focus on what you need to do in the future. Unfortunately, a Chapter 7 bankruptcy is designed to be short, so this reprieve will only last four to five months. Don’t assume that you are stuck with your debts if student loans are causing you stress and anxiety. Reach out to our Sacramento Chapter 7 bankruptcy lawyers today to start exploring your financial options with confidence and peace of mind.

Chapter 13 Can Provide Some Relief In many cases, you will not be able to discharge your student loans through bankruptcy. However, you could still take advantage of reorganizing your debt through a Chapter 13 bankruptcy. When you file for a Chapter 13, you will propose a bankruptcy plan that will pay all or a portion of your credits over three to five years. The amount you must pay is determined by the type of debt and your disposable income. So how does this help with unmanageable student loans? To illustrate, imagine someone has a monthly student loan payment of $800 a month. They cannot afford the payment along with their rent, car payment, and other monthly expenses. This individual also has $20,000 of credit card debt and an unsecured personal loan of $15,000. Because of their income, they qualify for Chapter 7. However, they make too much to discharge their student loans. If their income is below the median average, they could also file a Chapter 13 case and discharge their unsecured debt. While the student loans are non-dischargeable, they do not have to be paid back in full through bankruptcy. The debtor will have to make a monthly trustee payment. This payment will be used to pay the trustee’s fee, usually a portion of their attorney’s fees, and some will go to the student loan lender. However, it will not be $800. The amount will be based on what is available after the debtor’s reasonable expenses are deducted from their income. In this case, after our California bankruptcy attorneys prepare the filing, the debtor is showing $110 in disposable income. Therefore, for five years, instead of paying $800 a month, they will have to pay $110. As a bonus, the credit card debt and personal loan are discharged. While the student loan will survive bankruptcy and continue to accrue interest, the debtor will get five years to improve their situation without worrying about their monthly student loan payment.

Sacramento Chapter 7 Bankruptcy Attorneys Can Help If you’re struggling to keep up with your monthly student loan payments, you certainly aren’t alone. More than 44 million borrowers currently owe repayments on student loans, and many require some form of assistance. If payment reductions, administrative forbearances, and other solutions haven’t helped to get your college debts under control, filing Chapter 7 bankruptcy may be an effective financial strategy. To learn more about filing for Chapter 7 in a free and completely confidential consultation, call the Roseville Chapter 7 lawyers of The Bankruptcy Group today at . We handle business and personal bankruptcy cases in the Roseville, Folsom, and Sacramento areas.