Bankruptcy and Existing Student Loans in New Jersey
Filing for bankruptcy in New Jersey can provide relief for nearly all types of debt, with the marked exception of student loan debt.
Student loans are lumped in with obligations such as child support and tax liabilities in that they are generally not dischargeable in bankruptcy absent a showing of undue hardship—an exception that has been interpreted extremely narrowly by the New Jersey courts to require that the debtor prove that he or she will never be able to repay the student loans.
Despite this, an experienced bankruptcy attorney can explain that it remains possible that bankruptcy can help with existing student loans in New Jersey.
The Undue Hardship Discharge Option
Although bankruptcy will not serve to eliminate most existing student loans in New Jersey, Bankruptcy Code Section 523(a)(8) provides a limited exception to allow discharge of student loan debt when the student loans impose an “undue hardship” on the debtor or their dependents.
As noted above, however, this exception has been narrowly interpreted to require that the debtor show he or she will never be able to repay the loans, generally by a showing of total and permanent disability or illness that will prevent the individual from ever being able to work again.
What is the Automatic Stay in New Jersey Bankruptcy Cases?
Individuals who are struggling with debt are undoubtedly familiar with the collections practices employed by lenders and debt collectors. Lenders and debt collectors will likely make frequent phone calls, send threatening letters and can even garnish wages or bank accounts in some cases.
The automatic stay is a feature of filing for bankruptcy that essentially freezes all debt collection actions and wage garnishments as soon as the debtor files the bankruptcy petition. The automatic stay also applies to student loan providers and servicers. As a result, the automatic stay can provide a bankruptcy debtor with existing student loans in New Jersey with a brief period of time in which to:
- Organize their finances
- Identify and evaluate alternative payment options, or
- Search for higher paying employment
What Happens to Student Loans After Expiration of the Automatic Stay?
While bankruptcy is not an option for eliminating existing student loans in New Jersey, it can help the debtor increase the likelihood of making the required payments going forward. A Chapter 7 bankruptcy filing discharges most of an individual’s unsecured debts, while the debtor in a Chapter 13 bankruptcy case enters into a repayment plan.
The Chapter 13 repayment plan essentially consolidates the debtor’s monthly payments to a reasonable level based upon their available income and assets. At the end of the repayment plan term, all unsecured debt is discharged, although the debtor remains liable for full repayment on secured obligations.
The bankruptcy discharge and repayment plan options can potentially provide some debtors with an avenue toward attaining a more reasonable overall debt level, which can free up income to meet student loan debt obligations. Additionally, the bankruptcy process can give the debtor additional time to reach an agreement for an alternate repayment plan with the student lender, including via:
- Income-based repayment options, which base monthly payments upon income levels
- Forbearance, or
Contacting a New Jersey Bankruptcy Attorney to Discuss Options
If you are considering bankruptcy and have existing student loans in New Jersey, an experienced bankruptcy attorney can explain how the rules governing the bankruptcy process interact with the potential for eventually making student loan payments more manageable.
While it is important to understand that existing student loan debt will not be discharged, you do have options to help get your financial obligations under control.