Student Loan Debt and Bankruptcy

Student Loan Debt and Bankruptcy in Iowa

Obtaining a discharge from student loan debt in a bankruptcy is not impossible , but it is very difficult. The standard for discharge is whether the paying of the student loans will place on undue burden on the debtor. The original cases  under the 2005 bankruptcy act dealt with people who were totally disabled and on social security disability. Those were easy cases.

The difficult cases are the debtors who have substantial debt  from schooling and acquired no enhanced job skills from the education. Usually, the debtor is going to have to have a substantial time frame of 10-15 years from the schooling to establish it has no value. Additionally, the debtor must an inability to make payments  as well as good faith efforts to resolve the student loan debts.

That means a debtor would have to have gone through the Department of education [DOE] process and internal appeals before the Bankruptcy court would intervene.

The forgiveness of student loans in a bankruptcy is not an all or nothing issue. The Court can order some of the loans paid and others discharged.

Another additional issue is parental liability for cosigned student loans.Iowa Business Bankruptcy Lawyer John Heckel

A family could end up with the former student having the debt forgiven in a bankruptcy proceeding and the debtor’s parents stuck with paying the loan back. The parents would have to file their own Bankruptcy to attempt to get the student loans discharged.

The main difficulty with student loan forgiveness is a conflict with the IRS code. Any debt forgiven is counted as income unless the forgiveness of the debt occurs in a bankruptcy. A person could complete the DOE repayment plans and have $50000 in forgiven debt. That becomes income and is taxed by the IRS.

I see two possible solutions for student loan debt:

One, the Congress could create a separate Bankruptcy chapter for student loans. Alternatively, the government could change the DOE  student forgiveness plans so that the remaining debt which is forgiven after the repayment program is not assessed as income by the IRS.

Questions? Contact me here or

Call: 319-373-1989

 

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