Filing for bankruptcy can be an effective way to get your financial house in order and create a new beginning for you and your family without being perpetually dragged down by debt. Although a Chapter 7 bankruptcy in California requires the debtor to liquidate much (but not all) of their assets, many of those who are considering bankruptcy do not have significant assets to begin with in light of their excessive debts.
This is especially true for those who have taken out large student loans to finance education but have been unable to produce significant income to pay back the interest and principal on those loans. But is student loan actually dischargeable in a California bankruptcy?
Most Student Loan Debt Cannot Be Discharged
While state law dictates the type of assets you can keep after a Chapter 7 bankruptcy, federal law bankruptcy law dictates what types of debts can be discharged, meaning you will no longer be obligated to pay them post-bankruptcy.
While credit card debt and medical debt, among other types of debt, can be discharged under federal bankruptcy law, student loan debt will not automatically be discharged. Why that is the case as a policy matter is not exactly clear, but it is important to keep in mind as you think about your debt options.
The exception to this rule is that, when a debtor can prove that there is an “undue hardship” in paying back the student loan, a bankruptcy court may decide to discharge it. Unfortunately, “undue hardship” is not defined, but courts have generally found that a person is unable to achieve a basic standard of living while having to pay back their loans (also, keep in mind that a court will likely require the debtor to seek any kind of work they can to pay their debts, as opposed to work in the specific field for which they took out their loans).
Ease Your Debt Burden By Discharging Other Debts
That said, while many student loans cannot be discharged in a California bankruptcy, other debts such as medical debt, credit card debt, and remaining balances after a home foreclosure or auto repossession can be discharged.
Thus, pursuing a bankruptcy which discharges other debts that exceed your ability to pay may still make sense for you even if your student loan is not discharged, as your overall debt can be significantly lowered.
Explore a Student Loan Modification or Chapter 13 Reorganization
A Chapter 7 bankruptcy is only one way an attorney can help you ease your debt burden. In a Chapter 13 bankruptcy, you and your attorney will work out a payment plan with your creditors (including student loan creditors), which can include changes such as lowering your interest rate, lengthening your time to pay, and/or reducing the principle you owe. Additionally, you will not have to liquidate your assets in a Chapter 13 bankruptcy as is required in a Chapter 7 bankruptcy.
Similarly, your attorney can work outside of the bankruptcy court system to achieve similar results by seeking loan modification of existing student loans and other debts. Many creditors are open to working with the loan modification process in order to get at least some return on their outstanding loan.
Get on the Road to Relief With the Loan Modification and Bankruptcy Attorneys at Gastelum Law
If you are unable to pay the bills due on loans (medical, student loans, credit cards, mortgages, etc.), we may be able to help reduce your debt burden and get you and your family on the road to financial relief. At the Law Offices of Omar Gastelum and Associates, PLC, our experienced attorneys will work with you to obtain both immediate and long-term relief through loan modification and, if necessary, bankruptcy protection. Contact the Law Offices of Omar Gastelum and Associates, PLC today for a free consultation on how our attorneys can help you start building a better financial tomorrow today.