Student loans that are federally subsidized can garnish up to 15% of your disposable income, which includes your entire tax return. This can be done without even filing a lawsuit. Private student loans can actually garnish up to 25% of your disposable income, but a lawsuit is required.
Filing bankruptcy, either Chapter 7 or Chapter 13, will stop a student loan garnishment immediately. However, simply filing bankruptcy will not solve the problem, because student loans are generally non-dischargeable in bankruptcy (except in extremely rare cases). A Chapter 7 will only stop the garnishment while the bankruptcy estate exits. Since a Chapter 7 usually only lasts 6 months or less, it provides a very temporary solution.
A Chapter 13 provides for a longer lasting solution, since Chapter 13 typically last around 5 years. While filing a Chapter 13 will stop the student loan creditor from contacting you or attempting to collect the debt, it will not discharge the underlying debt or interest. You are required to pay back your student loan to the extent you can afford it while you are in Chapter 13. It’s best to pay off as much as possible, since it is a problem that will persist even after bankruptcy is over.
Discharging Student Loans during a Bankruptcy
It is possible to discharge student loans in bankruptcy, but the standard is so difficult to meet, it almost never happens. The court summarizes the standard for discharging student loans in bankruptcy as “certainty of hopelessness.” I personally have never seen student loans discharged, although I do know a lawyer who succeeded in discharging them for his client. Essentially, a debtor must prove that paying back the loan will create an undue hardship for the rest of his or her life, codified by the Brunner Test:
- The Debtor must have made a good faith effort to pay back the student loans by trying to find a job, making as much money as possible, and minimizing expenses. It also helps if the Debtor has attempted to defer the student loan payments (this indicates effort);
- The Debtor must survive on an extremely minimal budget, consisting only of basics such as food, clothing, housing, and inexpensive entertainment;
- The Debtor’s financial condition is likely to last for a significant portion of the student loan repayment period.
In short, to discharge student loans, you have to prove that you have no way to pay the money back now or ever. Since there is almost always a chance that things will get better, student loans are rarely discharged.
Therefore, it is best practice to try and pay back as much on your student loans as possible. Sometimes the best solution is to simply call the student loan creditors to see if they’ll work with you. Student loan creditors are more likely to work with Debtors, because they know eventually the money will be repaid.
If your student loan creditor is garnishing you, taking your tax return, or otherwise causing you grief, give us a call at 404.585.0040 to find out more about how we can help.