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Bankruptcy Law

Bankruptcy Law introduction and resources

Overview

Individuals might use Chapter 7 or Chapter 13. 

Chapter 7 features:

  • Liquidation bankruptcy 
  • The bankruptcy trustee gathers and sells the debtor's nonexempt assets and uses the proceeds of such assets to pay creditors. Part of the debtor's property may be subject to liens and mortgages that pledge the property to other creditors. 
  • The individual’s income must be equal to or below the median income in their state. Each state has different income requirements. If the individual’s income is above the requirement, the court will apply a “means test”.

Chapter 13 features:

  • Develop payment plan to repay part or all debts.
  • Debtor is usually allowed to keep property. 
  • Individual has regular income. 

There is no chapter in the Bankruptcy Code for medical bankruptcy. It doesn’t exist as a specific form of bankruptcy relief offered by the federal government. “Medical bankruptcy” is a non-legal term for describing bankruptcy resulting from medical debt. Individual might still use Chapter 7 or Chapter 13. 

Chapter 7 bankruptcy discharges or releases your responsibility for repaying certain types of debt, including an unlimited amount of medical debt.

Chapter 13, also known as a “wage earner’s plan,” is for those who have a regular source of income. If your medical condition doesn’t fully impede your ability to earn income, this may be the best option for you.

Private student loans:

Issued to students and/or parents by banks, credit unions and other lenders to cover college-related expenses. Loans can pay for anything from technical training to an undergraduate degree to professional school. Some lenders have specialized loans for things like medical school or law school, or targeted groups of borrowers like international students. They are much less common than federal loans, making up 7.89% of the total student loan market in 2021, according to the MeasureOne report.

If you have private student loans, the terms of repayment will vary, but reaching out to your servicer is the best place to start.

Federal student loans:

Issued by the U.S. Department of Education and are available to eligible students who attend a variety of schools, from four-year institutions to career-focused trade schools. Federal loans make up 92.11% of the $1.73 trillion in student loan debt in the U.S. in 2021, according to MeasureOne's student loan report.

If you've thought carefully about the decision and have done your due diligence to exhaust all other options, you might consider moving forward with a bankruptcy filing for Federal student loans. 

To successfully have your federal student loans discharged in bankruptcy, you will need to prove that repaying them would cause an "undue hardship." There is no standard definition of undue hardship, and each situation is up to the discretion of each bankruptcy court. Most courts use a set of criteria known as the Brunner test to determine whether repaying student loans would cause an undue hardship. To pass the Brunner test, you must prove you meet the following three criteria:

1. Your income and expenses do not currently allow you to continue a basic or minimal standard of living for you and your dependents if you're forced to repay your student loans.

2. This financial situation will, most likely, continue for a majority of your student loan repayment period.

3. You have made good faith efforts to try to repay your student loans before filing for bankruptcy.

Excerpt from "Student Loans and Bankruptcy: What to Know" from U.S.News.