You may be dealing with medical bills, credit cards and/or student loans and wondering whether all or none can be eliminated in a bankruptcy. Furthermore, you may be wondering how each type of bankruptcy deals with medical bills credit cards or student loans. This is a common question. The purpose of this article is to cover each of these options thoroughly and provide a calculator to compare options such as Chapter 7 bankruptcy, Chapter 13 bankruptcy, debt settlement, debt management and debt payoff planning.
The goal of Ascend is provide debt freedom easier, cheaper, and faster, so please reach out to us if we can help you in that way. Here’s the 4 points that we will cover in this article:
- Can You File Bankruptcy on Student Loans?
- Are you able to File Bankruptcy on Medical Bills?
- Can You File Bankruptcy on Credit Cards?
- Bankruptcy Calculator to help compare your options
1) Can You File Bankruptcy On Student Loans?
It is difficult for student loan debts to be dischargable in bankruptcy. Student loan debt is a significant financial burden for millions of individuals in the United States. According to 2020 figures, approximately 45 million people owe a total of $1.6 trillion in student loan debt. Student loans are second only to mortgage loan debt. With that much student loan debt, it is not surprising that one of the most commonly searched bankruptcy questions is, “Can I get rid of student loan debt in bankruptcy?” The answer is, “maybe.”
It is Difficult for Student Loans to be Dischargeable in Bankruptcy
Student loans are one of the few unsecured debts that are not eligible for a bankruptcy discharge (debt forgiveness). If you file a bankruptcy case, you likely will continue to owe your student loans. However, there are exceptions to that rule. Some individuals can qualify for a hardship discharge of student loans. However, you must petition the court for the student loan discharge and meet all requirements under the Brunner Test.
How Can I Discharge Student Loans in Bankruptcy?
The Brunner Test is a set of three requirements that a debtor must meet before discharging student loan debt in Chapter 7 bankruptcy. The requirements are based on the findings in a 1987 bankruptcy case (Brunner vs. New York State Higher Education Services, Corp.). In the Brunner case, the bankruptcy judge used a three-prong test to determine if the debtor could discharge student loan debt. Other bankruptcy judges have adopted the Brunner Test in other cases. The requirements to discharge student loan debts are:
1. Minimal Standard of Living Test
The first element determines whether the debtor can maintain a minimal standard of living for the debtor and the debtor’s dependent if the debtor continues to repay the student loan debt. If the debtor can maintain a minimal standard of living, the court finds that the student loan debt is not dischargeable in bankruptcy. If not, the court moves to the second element.
2. Continuation of Current Financial Situation
The second element analyzes whether the debtor’s current financial situation is expected to continue for the majority of the remaining term of the student loan contract. For example, is the debtor now disabled and will not be able to return to work, or is the debtor earning the maximum or near the maximum income expected for the debtor based on the debtor’s age, career, education, skills, and other factors. If the debtor’s current financial situation is expected to improve during the term of the student loan, the judge may not grant a discharge of student loan payments.
3. Good Faith Effort
If the debtor passes the first two tests, the judge determines whether the debtor has made a reasonable effort to repay the loans. If so, the judge may grant a bankruptcy discharge for student loans.
Defining Undue Hardship and Good Faith Effort
Unfortunately, there is not a standard definition for what constitutes an undue hardship or a good-faith effort. Judges throughout the country have used various methods to determine if repaying the student loan payments would create an undue hardship that prevents the debtor from maintaining a minimal standard of living. Likewise, judges have interpreted the good faith effort in various ways.
Working with a bankruptcy lawyer can be helpful. A local bankruptcy attorney is familiar with the bankruptcy judges and cases decided in that district. Therefore, the attorney understands the standards used by the bankruptcy judges to decide motions to discharge student loans. Furthermore, a bankruptcy attorney can draft a motion and present a case that gives you the best possible chance of success based on your unique circumstances.
Chapter 13 Bankruptcy and Student Loans
If you cannot discharge student loans through Chapter 7, you can obtain some relief through Chapter 13. During your Chapter 13 case, your student loan payments are deferred. They continue to accrue interest, but you are not required to pay the loan payments until your case is completed. Some debtors choose to continue paying their student loan payments or as much of the payment as possible during the Chapter 13 case. Other debtors wait until their bankruptcy plan is finished to resume payments. By discharging other unsecured debts through Chapter 13, a debtor is in a better financial position to handle the student loan payments after the Chapter 13 discharge.
How to Pay Student Loan Debts?
There could be several non-bankruptcy options to handle your student loan debts. If you are struggling with student loans, you may want to research one or more of the following options for paying student loans.
- Student Loan Consolidation
- Pay As You Earn Repayment Plan
- Graduated Repayment Plan
- Refinancing Student Loans
- Income Contingent Repayment Plans
- Student Loan Forgiveness
- Revised Pay As You Earn Repayment Plan
- Income-Based Repayment Plan
If you experience a short-term financial hardship, you might qualify for a student loan deferral or a forbearance. The deferral or forbearance may give you the temporary relief from student loans that you need to recover from a financial crisis.
2) Can You File Bankruptcy On Medical Bills?
Yes, you can file bankruptcy on medical bills. Medical bills are unsecured debts included in bankruptcy. A common reason people file for bankruptcy relief is to get rid of medical bills.
Medical hardship is prevalent in the United States especially for those ages 18-64 and those without healthcare according to a study titled, “Prevalence and Correlates of Medical Financial Hardship in the USA” from August, 2019. This is primarily due to the high patient out-of-pocket (OOP) spending for medical care driven by the rise of high deductible plans. However, a medical bankruptcy may not be the best debt-relief solution if the only reason you are filing for Chapter 7 or Chapter 13 is that you have medical bills you cannot pay. Let’s explore medical bills and bankruptcy in greater detail.
Unsecured debts are debts that you owe, which are not secured by collateral. Generally, medical bills fall into this category of debt. Also included in this category of debts are credit card debts, personal loans, student loans, alimony, most taxes, old utility bills, and child support payments. Not all unsecured debts are eligible for a discharge. For example, you cannot get rid of alimony and child support by filing bankruptcy. Most taxes and student loans are also not eligible for discharge in bankruptcy. However, medical bills are generally always dischargeable in bankruptcy.
Filing Chapter 7 Bankruptcy to Get Rid of Medical Bills
When you file a Chapter 7 bankruptcy case, most unsecured debts are discharged. A creditor cannot collect a debt that is discharged in bankruptcy. The legal liability to repay the debt goes away. The creditor cannot call you, send collection letters, file a debt collection lawsuit, report the debt on your credit report as delinquent, or take any other actions to try to force you to repay the debt. Most Chapter 7 cases filed in the United States are no-asset Chapter 7 cases. A no-asset Chapter 7 case is a case in which the debtor does not lose any property. No-asset Chapter 7 cases take about four to six months to complete.
However, in some Chapter 7 cases, a debtor (the person who files for bankruptcy relief) could lose some of his or her property. The Chapter 7 trustee sells the property and uses the money to pay the debtor’s unsecured debts. Therefore, before filing a Chapter 7 bankruptcy case, it is important to consider whether any of your property is at risk of being sold through bankruptcy. Bankruptcy exemptions protect some of your property from being sold by the Chapter 7 trustee. However, if you have substantial equity in your home, vehicle, and other personal assets, you may not want to file a Chapter 7 for medical bills.
Filing Chapter 13 Bankruptcy to Get Rid Medical Bills
A Chapter 13 bankruptcy case is a repayment plan. You enter a three-year to five-year bankruptcy plan to repay your debts. In most cases, a Chapter 13 bankruptcy plan only pays a small percentage of the money owed to unsecured creditors. When the Chapter 13 plan is complete, any remaining amounts owed to unsecured creditors are discharged, provided that the debt is eligible for a discharge in bankruptcy. Therefore, if you owe medical bills, your creditors will receive a percentage of the money you owe them for the medical debts. Once you complete your bankruptcy plan and you receive your discharge, your legal liability to repay the remaining amount owed on the medical bills is eliminated.
A Chapter 13 bankruptcy case is a good option for individuals who do not meet the income qualifications for filing under Chapter 7. This chapter of bankruptcy may also be a good choice for a person who owns property that might be at risk of being sold in Chapter 7, has non-dischargeable debts (i.e. alimony, taxes, etc.), or is behind in their mortgage payments and car loan payments. The downside of Chapter 13 is that you are in a bankruptcy repayment plan for a long time. Most Chapter 13 plans are 60-month plans. If you fail to complete the Chapter 13 plan, you do not receive a discharge, and you continue to owe all the debts you owed before you filed for bankruptcy relief.
Are There Other Options to Repay Medical Debts?
If the only debts that you are struggling to pay are medical debts, there could be other options for debt relief. For example, a debt relief company or you could try settling medical debt and getting on a repayment plan with your creditors that is affordable for your income and expenses. You may also be able to negotiate a one-time lump sum payment to satisfy the debt that is lower than the amount you owe. There are also debt consolidation options and other options for repaying medical bills other than filing a Chapter 7 or Chapter 13 bankruptcy case.
3) Can You File Bankruptcy On Credit Cards?
The simple answer is, “Yes, you can file bankruptcy on credit cards.” However, filing bankruptcy on credit cards is a bit more complicated. You need to determine if you qualify to file bankruptcy and under what chapter of bankruptcy you are eligible to file. You must also determine if filing bankruptcy is right for you. Some people who owe credit card debt might benefit more from a non-bankruptcy alternative for getting rid of credit card debt. Let’s explore each of the options for getting rid of credit card debt in more detail.
Filing Bankruptcy on Credit Cards
Filing bankruptcy typically gets rid of all credit card debt. Most credit card debt is unsecured debt. Unsecured creditors do not hold a lien on collateral to secure the debt. Therefore, if a creditor wanted to try to collect on credit card debt, the creditor would need to file a debt collection lawsuit, obtain a monetary judgment against you, and petition the court for a wage garnishment order or levy. Not all states permit wage garnishments. Furthermore, most states exempt certain assets from being used to repay judgments. Filing Chapter 7 or Chapter 13 should get rid of credit card debt under most circumstances. However, it that is the only reason you are filing for bankruptcy, you may want to consider non-bankruptcy alternatives to get rid of credit card debt.
Also, if credit card debt is the only debt you owe and your state does not permit wage garnishment, you may want to discuss the matter with a bankruptcy lawyer before filing Chapter 7 or Chapter 13. If the debt is small and the creditor will not be able to enforce a judgment, filing bankruptcy might not be the best option for you. Most bankruptcy lawyers offer free consultations. You can get several legal opinions to help you make the best decision for you. If you have other debts, high credit card debt, your state permits wage garnishments, or you have substantial assets, filing bankruptcy for credit card debt might be the best way to wipe out debts and protect your property.
Are Credit Cards Always Dischargeable in Bankruptcy Court?
There are instances in which credit card debt might not be dischargeable in bankruptcy. For example, if you use your credit card to pay off tax debts, alimony, child support, or other non-dischargeable debts, you cannot discharge that amount of credit card debt. In other words, you cannot transfer non-dischargeable debts to a credit card so that you can get rid of those debts by filing bankruptcy.
Also, recent charges to credit cards are not eligible for a bankruptcy discharge. Charges to your credit cards for luxury items or services of $725 on a single credit card within 90 days before filing bankruptcy are presumed fraudulent. Luxury items and services are things that are not necessary for the support of the debtor or the debtor’s dependents.
Therefore, if the credit card company files an adversary proceeding (lawsuit), the debt may not be dischargeable. The debtor would need to prove he did not commit fraud to get rid of the credit card debt. Likewise, cash advances of $1,000 or more during 70 days before filing bankruptcy are also presumed fraudulent. If the credit card company files an adversary proceeding, the debtor could owe that money even though the debtor filed for bankruptcy relief. It is generally best to stop using all credit cards as soon as you decide to file for bankruptcy relief. If you have substantial credit card use within the past three months, talk to a bankruptcy lawyer about the timing of your bankruptcy filing.
Debt Consolidation and Debt Settlement to Pay Off Credit Cards
For some people, debt consolidation or debt settlement may be a good way to get rid of credit card debt. However, there are pros and cons of these debt relief options.
One of the most significant disadvantages of debt consolidation is that many people use their home equity to consolidate credit card debts. In a bankruptcy case, the equity in your home is usually protected from being used to repay your unsecured debts. By using your home equity to repay credit cards, you are turning unsecured debts into a secured debt. If you fail to pay the home equity loan payment, you could lose your home.
There are a couple of problems with debt settlement. First, you need enough money to pay lump sum payments to your creditors to settle the debt. Many people use their retirement savings or the proceeds from a debt consolidation loan to negotiate settlements with credit card companies. Like the equity in your home, your retirement savings are protected in bankruptcy. Therefore, you are using funds that you will need to support yourself during your retirement unnecessarily.
Also, the amount that the credit card companies “write off” when you settle the debt is considered income by the Internal Revenue Service. You must report these amounts on your tax returns, which could result in tax debt for that year. Before you consider debt consolidation or debt settlement, read our Ultimate Guide to Credit Card Consolidation and Debt Settlement Guide.
Ascend has developed a method for paying off debt that utilizes some of the best elements from other debt payoff methods. The Savvy Debt Payoff Method utilizes the Savvy Debt Payoff App to help you budget and manage your finances and debts to pay off credit cards without bankruptcy.
4) Bankruptcy Calculator to help compare your options
Before you file bankruptcy, it is wise to explore all the options to deal with student loans, medical bills and credit cards. Each debt relief option such as Chapter 7 bankruptcy, Chapter 13 bankruptcy, debt settlement, debt management, and debt payoff planning have different costs, nuances and pros and cons to consider. The calculator provides the following:
- Estimated all in cost of Chapter 7, Chapter 13, Debt Settlement, Debt Management and Debt Payoff Planning.
- Breakdown of what goes into the costs.
- Pros and Cons for each debt relief options
- Options near you for each debt relief option
Ascend provides information about bankruptcy for individuals who are struggling to pay debts they cannot afford to pay. Through our blogs, bankruptcy guides, and bankruptcy articles, we give you information about the various bankruptcy chapters and debt relief options available to you. If you need a bankruptcy lawyer, we can help you find a bankruptcy attorney near you. If you have questions, contact Ascend online or by calling 833-272-3631 to speak with a representative.