Articles Posted in Student Loan and Tax Debt

Student loan and tax debt – nobody likes dealing with either of these areas. Almost everyone thinks that bankruptcy cannot help in these areas either. Not true! There of course is a lot of proposed new law regarding student loan and tax debt that is being considered in regards to giving bankruptcy more room to help, but it still can help even now.  Right now, you cannot file bankruptcy and wipe out Sales Tax (or other certain types of taxes), but you can file bankruptcy and wipe out your Income Tax (if it meets certain criteria). The income tax debt has to be a certain age, your tax returns must have been filed, and a few other things which we discuss in this area of our blog. If you have taxes that are new or do not qualify to be wiped out in a bankruptcy, you can still file a Chapter 13 case and extend out repayment of the taxes for up to 5 years. Often the IRS will only offer 2 year agreements, which depending on the amount you owe, could be unreasonable where as a 5 year plan may be much more doable.  Student loans for the most part cannot be wiped out by bankruptcy. Private student loans and Federal student loans have an exception called “undue hardship” that you can apply for but it is extremely hard to qualify. So Bankruptcy can help by stepping in and forcing a halt on payment of student loans or force an amount that is something you can afford – either way – for up to 5 years.

Student loans are not usually wiped out in bankruptcy like other debts (although bankruptcy can provide assistance).  But the court still requires that you list your student loan debt in the bankruptcy, since this is a debt that you owe.  This can be difficult, especially while they were in forbearance, if you have not kept track of your loans

For federal student loans, you can locate all of your lenders and student loan debt on The Department of Education website. It’s called the “National Student Loan Data System”.  Go to and click the “Financial Aid Review” button, and just follow the instructions. This will give you a print out of all your student lenders and their contact information.

For private student loans, you can’t go to a single website that has information about all of your private student loans.  However, private student lenders may be reporting your loans to the credit bureaus and you can locate their names by requesting a free credit report at

If you are having trouble paying back your student loan debt, the Department of Education has options that will give you more protection from debt collectors collecting on federal education loans.  These regulations should make it easier for you to get your federal student loans out of default.

These rules do not apply to private student loans, only to loans made or guaranteed by the federal government.  For example, if you are in default you can”rehabilitate” loans by making nine “reasonable and affordable” on-time payments during a period of 10 consecutive months. You must agree in writing to make these 9 voluntary payments (as determined by your loan holder) within 20 days of the due date. This will allow you to get out of default and become eligible for further federal student aid or other repayment programs. Keep in mind that Student Loan Rehabilitation is a 1-time opportunity only.  It cannot be repeated.

Some private debt collectors who were collecting on federal loans fail to offer payments that borrowers can afford; instead offering payments based on a percentage of the borrower’s total debt.  Such payments mean increased commissions for the collection agencies, but are unworkable for borrowers.  Some debt collectors try to also demand minimum monthly payments without telling people about the more affordable alternatives, even though the laws of federal student aid does not require those minimum payments.  In 2014, the Department of Education really cracked down on these practices.

I get countless calls from people asking what they can do to about their parents or grandparents who co-signed for them on a student loan and are now facing garnishment, loss of their tax refunds, or even seizure of their bank accounts because they co-signed and the loans have not been paid.

This is a common tactic for debt collection on student loans.  If the student isn’t working – they will go right after anyone who co-signed for the loan.  And they have broad powers – there is no notice required – they can garnish, etc without warning unlike collection of normal debt where there must be a lawsuit filed and judgment obtained first, etc.

It’s pretty well known you cannot wipe out student loans through bankruptcy, but if you file a Chapter 13 bankruptcy, you can stop all action – against you AND against anyone that co-signed for your student loan.  Chapter 13 bankruptcy protects the debtor and co-debtor.  Both do not have to file – just one.  If the co-debtor files it protects the main debtor and vice versa.  For example – mother co-signed for son’s student loan.  Mother files Chapter 13 bankruptcy (maybe even for other reasons) – it protects the son regarding the student loan they both signed for.  Or son files Chapter 13 bankruptcy – it protects the mother.

paying uncle samIn a Chapter 7 and Chapter 13, as long as four basic criteria are met, both state and federal income taxes can be discharged.

  1. The tax return due date was at least 3 years before filing bankruptcy.
  2. The filing of the tax return must have been done at least 2 years before the bankruptcy filing.

student loan debtYes and no.  Student loans cannot be discharged in a Chapter 7 or Chapter 13 bankruptcy (unless you can establish substantial hardship).  Changes to the US Bankruptcy Code in 2005 even made private student loans non-dischargeable. BUT – a Chapter 13 does allow you to decrease or stabilize the repayment of your student loan debt for a 3-5 yr period.  In a Chapter 13 bankruptcy, you can decide how much you can afford to pay monthly towards this debt rather than being at the mercy of possible garnishment, seizure of your tax refund, and bank account funds.  If you are facing hardship due to student loan debt, consult an experienced bankruptcy attorney to fully understand all options and strategies available to you as soon as possible.  You may not need to take action immediately, but you need to know what options are available so that you can take action quickly if and when it is needed.

A debtor must establish a substantial or undue hardship in order to receive a discharge (debt wiped out) of student loan debt in a Chapter 7 or Chapter 13 bankruptcy.  Undue hardship typically means that you cannot maintain a minimally adequate standard of living and repay the loan.  The rule, found in a New York bankruptcy case called Brunner vs New York Higher Education Services Corp., sets out a 3 part road map for discharging student loans in Chapter 7 bankruptcy.  

  1. You must prove that you cannot maintain, based upon current income and expenses, a minimal standard of living for yourself and your dependents if forced to repay the loan.
  2. Additional circumstances must exist indicating that the state of affairs is likely to persist for a significant portion of the repayment period; and
  3. You must have made a good faith effort at repayment.

The definition of student loans now includes private student loans as well as the federally-guaranteed ones and most bankruptcy courts take a hard line on this test, making it extremely difficult to discharge a student loan in bankruptcy, but, in rare cases, possible.    

If you filed had your home foreclosed or surrendered it in bankruptcy last year you will be receiving a 1099 from your mortgage company.  Do not ignore this.   Deal with it now, otherwise it will cause you problems in the future.

Here is what you need to do. IRS-Form-1099-MiscThere is a special tax relief available called the “Mortgage Forgiveness Relief Act of 2007“.   This will forgive the debt and you will not owe any tax on the amount listed on the 1099 form.  Make sure your tax preparer knows you suffered a foreclosure or filed bankruptcy.   If you have already filed your tax return then you will need to file an amended return.

If you are a self-employed worker you will receive a 1099 for your wages instead of a W-2 form. But there is another type of 1099 that you may receive from one of your creditors. This is form 1099C.  A 1099C form is used when all or a portion of a debt is canceled or forgiven by the creditor. If the amount exceeds $600.00 a creditor must report this debt forgiveness to the IRS. The IRS counts the forgiven or cancelled debt as income that must be reported on your tax return.

You should receive a copy of the 1099C form in the mail from your creditor(s) when they file the form with the IRS.  You may not have gotten a copy. If not, the IRS will send you a notice stating you failed to include income on your tax return as a result of a creditor filing the 1099C form. Now you owe taxes, penalties and interest on the amount.

But wait, there are reasons why you may not have to pay taxes on this canceled debt. Here are some of the exceptions listed in IRS Publication 4681 that would relive you of the taxes, penalties and interest.

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