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When homeowners don’t repay their mortgage or property taxes in a timely fashion, lenders, municipalities and other creditors can seek to reclaim their asset through the foreclosure process. 

In order to reclaim their asset — in this case your home or an investment property— the creditor must follow strict guidelines that are set forth by the state in which the home is located. Once this happens, foreclosure sales and execution sales allow the creditor to recoup the money the borrower hasn’t paid.

There are two main types of foreclosures — judicial and non-judicial — and each state has rules about which one can and/or must be used.

Below is a guide to each type of foreclosure, including details about how the process works.

Judicial Foreclosure: Definition and Overview

Judicial foreclosure is a type of foreclosure that involves the court system. In judicial foreclosures, the lender will need to file an official lawsuit in state circuit court in the county the property is located to reclaim their asset.

This happens in many states where there isn’t a power of sale clause in mortgage documents, which would give the lender the legal authority to sell a property if the borrower defaults on the repayments.

Because of this fact, the foreclosure process can take many months, and sometimes even years, to complete. 

Each state will also determine whether there is an availability for borrowers to enter into foreclosure mediation with the lender, and whether there’s a right to cure/reinstate the mortgage once the process begins.

How Judicial Foreclosure Works

In states where judicial foreclosure is allowed or required, there are specific steps that lenders need to follow in order to follow through the process. 

Step-by-Step Explanation of the Judicial Foreclosure Process

The first step in the judicial foreclosure process is that the lender must send a letter to the borrower notifying of its intent to foreclose. This can only happen after the borrower is behind on payments for at least 120 days.

In most states, the debtor will have 30 days to make good on the delinquent payments. If they do not, then the lender must file a lawsuit in court. At the same time, they must issue the borrower a notice of the foreclosure lis pendens by issuing them a summons. 

The borrower can then decide to allow the foreclosure process to proceed, or they can contest it by appearing in court. During the case, if the court decides in favor of the lender, it will enter a judgment that will order the property to be sold to satisfy the outstanding debt. 

In some states, if the sale proceeds don’t cover the outstanding debt, then the lender could be able to seek a deficiency judgment. This would allow the lender to obtain a personal judgment from the borrower so they can recover the difference between the outstanding debt amount and what the house sold for during the foreclosure sale.

One exception to this process is if the borrower has filed bankruptcy and chosen to include the home in the process, which could result in a discharged mortgage.

Non-Judicial Foreclosure: A Different Approach

The other main type of foreclosure is called a non-judicial foreclosure. In the state of Michigan, this is commonly known as a foreclosure by advertisement. While there are some similarities between this type and judicial foreclosures, there are major differences, too.

Key Differences Between Judicial and Non-Judicial Foreclosure

The biggest difference between a judicial and non-judicial foreclosure is that a non-judicial foreclosure doesn’t involve the court system at all. In states that allow it, lenders can foreclose on a home without going through the court system.

The deed of trust or a mortgage on the home will authorize a neutral, third-party trustee, or through the county sheriff’s office to conduct the foreclosure by advertisement process on the property if a borrower defaults on the loan. This process is able to move forward if there’s a “power-of-sale” clause in the mortgage note, which gives the lender the right to sell the house and use whatever profits they obtain to pay off the balance of the mortgage.

The rules and regulations for non-judicial foreclosures vary widely by state, and state law will determine which milestones need to be reached for each step of the foreclosure process. Even one missed payment in some states can trigger the process and allow lenders to start the foreclosure process.

State-by-State Variations in Foreclosure Laws

As mentioned, there are major state-by-state variations in foreclosure laws. The laws that apply are based on where the home is located, not where the lender is located.

Understanding your individual state’s laws when it comes to foreclosure is important, because it outlines what your rights as a borrower are, in addition to outlining what lenders must do to foreclose on a property.

Not only will the state laws determine whether a judicial or non-judicial foreclosure will be used, but they’ll also determine how long the foreclosure process will take, whether deficiency judgments are allowed, what notifications must be given to the borrower and when, whether the borrower can redeem the property during the process and much, much more.

There are 18 states that allow judicial foreclosure, though some of those states also allow non-judicial foreclosures in some instances. In Iowa, for example, a non-judicial foreclosure option is available if the borrower and lender can agree on it. 

The remaining 32 states either allow for non-judicial foreclosure, or offer both as options for lenders.

Understanding Deficiency Judgment Laws Across the US

The reason why it’s important to understand your state’s foreclosure laws is that they determine what actions can trigger foreclosure. For instance, in some states, being late on your mortgage payments by even one day is enough for a lender to foreclose.

The entire foreclosure process can take different amounts of time to complete, depending on the state, as well. Plus, some states allow for borrowers to cure/reinstate their mortgages along the way, and some allow for foreclosure mediation and adjustments to the original mortgage.

In addition, some states allow for deficiency judgments, which is basically a personal judgment that’s levied against the borrower should there be a discrepancy between how much the home sold for during the foreclosure sale and the total amount owed on the mortgage.

In these states, borrowers are at risk of not only losing their home through the foreclosure process, but also having to pay this deficiency — which can end up being very costly.

Deficiency judgment is allowed in all but six states, with some exceptions. In only Washington state, Oregon, Montana, Minnesota, California and Alaska is deficiency judgment not allowed in most cases. All of those states are also non-judicial foreclosure states.

Since Michigan legalized marijuana usage in 2018 through Proposal 1, CBD is completely legal in Michigan. This bill allowed for the recreational growth, purchase, production and possession of marijuana by anyone who is at least 21 years old. This also included any CBD product derived from marijuana.

There are some important things to note if you are under 21 years old, though.

In 2018, the Agricultural Improvement Act, also known as the Farm Bill, made CBD oil that’s derived from industrial hemp legal for people of all ages across the country. One year later, in 2019, Michigan adjusted its state laws to align with the new federal law, through what’s known as the Industrial Hemp Research and Development Act.

These products can’t be added to beverage and food in Michigan, though. So, this means if you’re under 21, you can’t possess beverages infused with CBD or CBD edibles.

CBD that’s derived from marijuana is illegal for anyone under the age of 21 to possess. Anyone 21 and older may use and possess any form of it.

It’s also important to note that even though recreational marijuana is legal in Michigan — and CBD derived from industrial hemp is legal across the country — you still can’t travel with it across state lines. At airports, for instance, you could face serious consequences if TSA finds cannabis in your luggage.

Is CBD a Drug?

Before diving into the specific laws, it’s important to understand what CBD is. CBD is the acronym for Cannabidiol, a chemical that comes from a plant called Cannabis stavia, which is more colloquially known as either hemp of cannabis. 

There have been more than 80 chemicals found in that same plant, and they’re collectively known as cannabinoids. The most well-known is THC, the active ingredient in marijuana that gives people the feeling of being “high.”

CBD comes mainly from hemp, which is a form of the same Cannabis sativa plant, though it contains much smaller THC amounts. It has similar effects on the body as THC, without the “high” feeling THC produces in the brain.

For this reason, CBD has been used for a while now as a prescription to treat people with seizures, pain, anxiety, Crohn disease, Parkinson disease and other conditions.

CBD is considered a controlled drug, and its legality is set by various laws in America.

What is the CBD Law in Michigan?    

Michigan first legalized CBD in 2008, along with legislation that made medical marijuana legal. In 2018, the federal government weighed in on the issue, making industrial hemp that contained 0.3% TCH or less legal.

In 2019, Michigan altered its laws slightly so that they aligned with federal law, making CBD products derived from hemp legal as long as they had less than 0.3% THC.

Michigan also made recreational marijuana usage legal the same year, which expanded what CBD products people were allowed to purchase, possess and use in the state.

What CBD Products are Legal?

CBD products that are derived from both marijuana and hemp are now legal in Michigan. Once the state legalized the recreational use of marijuana, both of those products became legal.

If you are in Michigan and over the age of 21, you are legally allowed to purchase, possess and use any CBD products, no matter where they are derived from. 

Under the state’s recreational marijuana law, anyone who is over that age are allowed to have in their possession as much as 2.5 ounces of marijuana when they’re outside their home and as much as 10 ounces when they’re on their own property. These rules also apply to CBD that is derived from marijuana.

The one thing to keep in mind is that these are state laws and not federal laws. It is only legal to possess CBD that’s derived from hemp and has less than 0.3% THC federally. So, if you are traveling out of state, it’s important that you follow each individual state’s laws in regard to CBD.

Are Edibles Legal in Michigan? 

CBD products come in many different forms. Edibles, those that you eat, are one of the most popular forms. Michigan law doesn’t stipulate which forms people are and are not allowed to purchase, possess and use. As such, CBD edibles are legal in Michigan.

How Much CBD Can You Buy in Michigan? 

The rules for CBD follow the rules laid out in the recreational marijuana law passed in 2019. Anyone who is over the age of 21 can legally purchase CBD in Michigan.

If the CBD product is derived from hemp, there is no limit to how much you can purchase legally — as long as it contains less than 0.3% THC. The limits to how much you can legally purchase only come into play when the hemp-derived CBD contains more than 0.3% THC or is derived from marijuana.

In these cases, you can purchase up to 2.5 ounces at a time. That is because you are only allowed to possess that much outside of your home. You can possess up to 10 ounces while on your property, though, which means you can purchase up to 2.5 ounces multiple times and then keep it for future use.

Do I Need a Card to Buy CBD?

Once voters in Michigan passed the recreational usage of marijuana in 2018 — and it officially became law in 2019 — people no longer had to have a card to buy CBD in the state. Before then, you were required to have a medical marijuana card to purchase CBD products that were derived from marijuana.

In 2022, you do not need a card to buy CBD. You only need to be at least 21 years old.

Is it Legal to Give Your Child CBD Oil in Michigan?

Parents can legally give their children CBD oil in Michigan as long as it contains less than 0.3% THC and is derived from hemp. This product, as mentioned before, is not regulated the same as marijuana either in the state of Michigan or federally.

Only in rare cases are other forms of CBD available for children, and those forms must come from a doctor’s prescription.

Is it Legal to Smoke CBD and Drive in Michigan? 

Michigan has very strict laws when it comes to driving under the influence. In fact, the state treats driving while under the influence of marijuana the same was as driving under the influence of alcohol.

Technically speaking, it is not illegal to smoke CBD and drive in Michigan as long as the product contains less than 0.3% THC. The problem, though, is that if you are pulled over and have THC in your system, you could be charged with driving under the influence.

That’s why it’s always advisable to not drive in Michigan if you have consumed CBD recently — regardless of what product it is.

Chapter 11 bankruptcy is one of the most popular options for businesses to seek relief when they are struggling financially. But, it is often an expensive and cumbersome process, which dissuades small businesses from pursuing it.

That’s a main reason why Congress passed the Small Business Reorganization Act of 2019 — to make it easier for small businesses to file for bankruptcy protection. The streamlined process called Subchapter V is the main aspect of the SBRA, which is a manageable and cost-effective option for small businesses to pursue.

Below are some more details about the SBRA.

Best bankruptcy for your small business

The type of bankruptcy that you pursue for your small business will depend on not just the financial situation that you’re in, but how you want to manage your business after the process.

Chapter 7 bankruptcy, for instance, is known as “liquidation.” That’s because all property and assets are sold off under the oversight of a bankruptcy trustee, and those proceeds are dispersed to creditors. Once the bankruptcy proceedings end, the business will shut down.

Chapter 11 bankruptcy is known as “reorganization.” That’s because the process allows business owners to still operate while they work out a plan to meet all their debts. Chapter 11 is much more in-depth and expensive, though, but Subchapter V makes available a streamlined version of it.

Personal Bankruptcy for Small Business Owners

Small business owners who want to file personal bankruptcy have a few options. 

Chapter 13 bankruptcy is also known as a reorganization bankruptcy, but it’s intended just for individuals. Sole proprietors can use this tool, therefore, to help them reduce their personal debt, which could include balances on credit cards, so that their business can remain open.

Sole proprietors and individuals can also file Chapter 7 bankruptcy, which will erase their personal debts, though their personal assets that are not protected could be subject to be sold.

Continuing Your Business: Factors to Consider

Before you decide what type of bankruptcy to file, there are some factors that you should consider about continuing your business.

First, you should analyze whether your business is making money. If you are losing money consistently, then it might be best for you to close the doors rather than trying to operate after bankruptcy. If you are profitable, though, reorganization could be a great way for you to restructure.

Second, consider if the value of your assets are greater than your liabilities. If your assets are worth more than your liabilities, then it would be in your best interest to try to continue operating after bankruptcy.

Finally, consider if you might be personally liable for your business debts. If you are responsible for these debts, then it could make more sense for the business to continue operating. If you close it, after all, your personal assets could be at risk.

The SBRA (Small Business Reorganization Act)

The SBRA took effect on February 19 of 2020, right before the full outbreak of the COVID-19 pandemic in the U.S. This act created Subchapter V for Chapter 11 bankruptcy that streamlined the reorganization process for small business owners. 

Subchapter V is essentially an alternative that small business owners can use to pursue Chapter 11 bankruptcy. In essence, the SBRA seeks to strike a solid balance between the two most popular bankruptcy options — Chapter 11 and Chapter 7 — allowing businesses to continue operating while also having a quicker, cheaper and more streamlined option for figuring out their debts.

Pros and cons of Chapter 7 and Chapter 13 bankruptcy

There are many pros and cons of the different types of popular bankruptcies. 

Chapter 7 allows you to wipe away personal debts and basically start anew. It provides a fresh start to a lot of individuals who find themselves underwater with debt, allowing them to wipe away unsecured debt while still protecting significant assets such as homes and cars.

On the flip side, Chapter 7 bankruptcy from a small business standpoint means that the business will have to be liquidated to cover outstanding debts. Small businesses will close once the Chapter 7 bankruptcy proceedings end.

Chapter 13, meanwhile, allows the filer to keep some of the assets and property that they’d normally lose through Chapter 7. It allows business owners to reorganize their personal debts so that they can continue operating their business.

The downside is that Chapter 13 doesn’t include any business debts at all. In addition, it can be a rather expensive process.

Going to bankruptcy court as a small business owner

Bankruptcy court can be a daunting place for small business owners to go. That’s why any business owner who is considering filing for bankruptcy should enlist the services of an experienced bankruptcy law firm such as Babi Legal.

Chapter 7 Bankruptcy for a Sole Proprietorship

Sole proprietors can file for Chapter 7 bankruptcy, just as individuals may. This allows filers to erase both their personal and business debts. Any assets that they have — both personal and business — are subject to be sold if they’re not protected by certain exemptions.

The business might end up closing through this bankruptcy process if the bankruptcy trustee needs to sell property and assets to cover debts. 

What Happens When a Business Files for Bankruptcy?

What happens to a business when it files for bankruptcy depends on which type of bankruptcy is filed. Chapter 11 bankruptcy allows the company to continue to operate and reorganize rather than liquidate.

Chapter 7 small business bankruptcy

Under Chapter 7, the business will immediately cease operating and will go out of business. The company’s assets will be sold off to cover its debts. As mentioned, the debts will be completely wiped out, but the company won’t be able to operate afterward. 

Limited Liability Partnerships (LLP)

Members of a LLP can file Chapter 7 bankruptcy so that all business debts can be disposed. In most cases, partnerships won’t receive discharges through this type of bankruptcy. 

All of the assets under this bankruptcy for LLPs will be liquidated and then dispersed to all creditors. In most cases, if any partner is liable for the debts of the partnership, then their liability won’t suffer from the bankruptcy that the LLP files.

However, if the value of the LLPs assets aren’t sufficient to pay off all creditors, then the credits could be able to claim the partners’ personal assets are liable for the debt.

The downsides of bankruptcy

While there are many advantages to filing bankruptcy, there are also some downsides as well.

How does filing a business bankruptcy impact credit?

Filing Chapter 7 or Chapter 11 bankruptcy shouldn’t affect a business owner’s personal debt if they’re operating a corporation or LLC. There are exceptions to this, however, including if you’re personally liable for the debt.

Your small business credit might get impacted by a bankruptcy as well. Bankruptcies make up anywhere from about 5% to 10% of business credit scores, which shows how significant filing for bankruptcy can be.

At the same time, if you file personal bankruptcy, it could also affect the credit score of your business.

Can a Small Business Owner Benefit From Filing a Personal Chapter 13 Bankruptcy Case?

While businesses can’t file Chapter 13 bankruptcy, the business itself can benefit from an owner filing this type of personal bankruptcy. If a small business owner frees up cash through the Chapter 13 bankruptcy, then the small business could benefit substantially from the investments that could be made.

The CARES Act, passed in the early stages of the COVID-19 pandemic, was a massive aid package that was meant to provide financial relief to individuals and businesses struggling during the pandemic and mandatory government shut-downs. 

With much of the country forced to shut down during the outbreak of the pandemic, people were left scrambling to figure out how they were literally going to put food on the table.

The CARES Act had many parts, including direct payments that most every American received. It also enhanced unemployment benefits and provided loans to small businesses to maintain their payroll — which turned into grants if certain requirements were met.

Another main aspect of the act dealt with mortgages and foreclosures. Below, we’ll dive deeper into the details of how the CARES act shields homeowners from foreclosure and eviction.

Coronavirus and the CARES Act

When the COVID-19 pandemic broke out in the U.S. in March 2020, virtually everyone across the country was forced to lock down in their homes. Schools and businesses were shuttered, except for a few essential services such as grocery stores and medical facilities. 

While some people were able to continue working from home, many others were laid off overnight. Some who weren’t laid off didn’t receive payment from their companies, because those businesses were no longer generating sales.

With all of this happening swiftly and at once, Congress stepped in to pass the CARES Act — with trillions of dollars in financial aid going to a number of different areas.

So many people were struggling paying their bills that the federal government didn’t want to see millions of homes go into foreclosure overnight. That’s why one of the areas that was covered under the CARES Act was mortgages and a moratorium on foreclosures that were backed by the federal government.  The CARES Act did not apply to privately held mortgages.

Foreclosure and the Coronavirus Pandemic

There were three main provisions in the CARES Act that dealt with mortgages and foreclosures. 

The most commonly-used aspect was a forbearance period, which allowed homeowners to pause the monthly payments on their mortgage for as much as one year. During the forbearance period, lenders were not allowed to charge late fees for missed payments, and also couldn’t report homeowners to credit agencies.

Mortgage forbearance didn’t forgive monthly payments, but rather allowed homeowners to skip them for a temporary period of time so they could use the money on other everyday essentials.

There were also provisions for foreclosures, sheriff sales and evictions.

Foreclosure Provisions of the CARES Act

To receive a forbearance on your mortgage, you had to request it directly from your mortgage servicer. All mortgages that were backed by the federal government in some capacity were eligible for this forbearance. That includes loans obtained through the VA, FHA, USDA, Freddie Mac and Fannie Mae.

The CARES Act stated that you only had to make this request and verbally declare that you were impacted by the Covid-19 Pandemic, and didn’t have to provide any documentation regarding your financial hardship.

While lenders weren’t able to charge late fees for any missed payments for loans that were in a forbearance period, they were allowed to choose how those missed payments would be handled once the period ended.

They could charge a lump sum payment — meaning that all missed payments would come due in one large lump sum once the forbearance ended. They could prorate the payments, evenly dividing the amount of all the missed payments by the number of missed payments, and then adding that amount on top of the regular monthly mortgage.

A third option would be to extend your loan so your missed payments were just tacked on at the end. The lender wasn’t required to allow borrowers to choose the repayment method, though they could certainly work together on it.

Sheriff sales and foreclosures judgment under the CARES Act

During the pandemic, homeowners who were being foreclosed on or were facing foreclosure got some major relief. Any lender working with a mortgage backed by the federal government wasn’t allowed to move for a judgment of foreclosure, initiate any foreclosure process (non-judicial or judicial), seek a sheriff sale, or execute an eviction related to a foreclosure or foreclosure sale.

The moratorium was put in place for three months initially, but then was extended multiple times. The only exceptions to the rule was if a property was abandoned or vacant.

Eviction restrictions

Homeowners facing foreclosure were not allowed to be evicted from their homes during the moratoriums. This basically put a pause on all foreclosure proceedings for a temporary period of time.

Foreclosure and your mortgage payment

The foreclosure process differs from state to state, based on the local laws that are in place. Typically speaking, mortgage companies are not allowed to initiate foreclosure until a certain number of days after the first missed mortgage payment.

From that point, there are many steps that must be followed.

Foreclosure process: How does foreclosure work?

In the state of Michigan, foreclosure can either be judicial or by advertisement. The timeline for each is the same, but there are some slight differences for how the process plays out.

Foreclosure timeline

In Michigan, the payment delinquency timeline actually begins on the second day after a missed mortgage payment. All payments are due on the first of the month, and will then be considered delinquent on the second. 

The mortgage company then has a process that they must follow to pursue foreclosure, which generally requires at a minimum 90 to 120 days of missed payments.

Missed mortgage payments

Once a mortgage payment is missed, late charges can be assessed. The lender or servicer of the loan is required to make live contact with the homeowner to inform them about options for loss mitigation.

On Day 45 after the missed payment, the lender or servicer has to assign a single point of contact to the homeowner and also provide a written notification of options for loss mitigation and the fact that they are delinquent.

The lender and borrower can work on a loan workout, modification of the loan or other option for loss mitigation. You can also make a partial payment if the lender allows it.

Foreclosure counsel and notice of default

At Day 121 after the missed payment, the foreclosure process can begin, if all other attempts at resolving the outstanding debt are unsuccessful.

At this point, an official notice of foreclosure will be recorded at the local courthouse. A date for a sheriff sale will be scheduled and published in a county newspaper for four consecutive weeks. That notice will also be posted at the property within two weeks of the first publication.

At this point, it is very important for homeowners facing foreclosure to enlist the services of an experienced foreclosure law firm to determine if the foreclosure process was followed correctly and if all options under the CARES Act were provided.

Other Foreclosure Provisions

In Michigan, the redemption period begins at the date of the sheriff sale through six months after it, though it could also last for 12 months in certain circumstances. The homeowner is allowed to live in the property during the redemption period and is not required to make payments as long as they maintain the property, utilities and insurance.

The borrower can redeem the property by paying the amount bid at the sheriff sale plus all interest and fees.

Judicial Foreclosures Vs. Nonjudicial Foreclosures

A judicial foreclosure requires the lender to take the borrower to court to get an official judgment. A non-judicial foreclosure includes a sheriff’s sale that must be advertised in a local newspaper with additional required notices such as placing a notice of foreclosure sale on the home itself.

Judicial Foreclosure States

There are 21 states plus the District of Columbia that predominantly use judicial foreclosure. They include Wisconsin, Vermont, South Carolina, Pennsylvania, Oklahoma, Ohio, North Dakota, New York, New Mexico, New Jersey, Maine, Louisiana, Kentucky, Kansas, Iowa, Indiana, Illinois, Hawaii, Florida, Delaware and Connecticut.

Nonjudicial Foreclosure States

The other 29 states predominantly use the non-judicial foreclosure process.

FAQS

Should I Have Filed Bankruptcy During the Pandemic?

The CARES Act and other economic stimulus packages passed during the pandemic provided some relief to people experiencing financial hardship. That being said, some people still needed to file for bankruptcy during the pandemic.

Do I Owe Money if the House Sells for Less than I Owe?

If your home is sold at sheriff’s sale for less than you owe on the loan, the lender can still go after you for the unpaid amount, which is referred to as the deficiency.

Can I Keep the Profits from a Foreclosure Sale?

In most cases, the borrower can keep any profits from a foreclosure sale. There may be other claimants to that profit, though.

How Will Foreclosure Hurt My Credit Score?

A foreclosure will typically lower your credit score by 100 points or more, and will typically last for about seven years. Over that time, your credit score will improve.

How Can I Stop the Foreclosure Process?

In Michigan, you can stop the foreclosure process by working directly with your lender to make up for missed payments, or by redeeming the property following a sheriff’s sale.

Student loan forgiveness has been a highly-debated topic for the last few years, as the federal government under both former President Donald Trump and current President Joe Biden has initiated various programs to delay repayments or forgive outstanding debt altogether.

Since the onset of the COVID-19 pandemic four years ago, there have been many twists and turns in the student loan forgiveness saga, leaving many borrowers unsure of what the future will hold.

Even still, millions of student loan borrowers have been able to benefit from different executive actions that relaxed rules for eligibility, modified programs in existence and streamlined all application processes. Some modifications to repayment systems have allowed some student loan borrowers to save as well.

Borrowers struggling with student loan debt may be able to qualify for forgiveness through various federal programs. Those who don’t qualify may not have many options, as we’ll dive into further below.

Federal student loans

Last June, the Supreme Court struck down a plan by Biden that would’ve canceled billions of dollars of student loan debt. In the time since, the White House has been working hard to find new ways to bring borrowers relief.

In mid-February, the latest plan was announced that would do just that. The latest update on student loan forgiveness will see more than 150,000 borrowers qualify for the cancellation of nearly $1.2 billion in total student loan debt.

Those who qualify are eligible under the SAVE plan, which is a repayment program for federal student loan debt based around income. Borrowers who have lower balances — $12,000 or less — and also have made repayments for at least 10 years qualify to have the remaining debt wiped away.

In total, the Biden administration has now canceled almost $138 billion in federal student loan debt, benefitting nearly 3.9 million borrowers in the process.

Student loan borrowers seeking discharge

While this latest announcement is surely a welcome one for many borrowers, it still leaves many students without any relief at all. Those who don’t qualify for the loan forgiveness through the SAVE program don’t have nearly as many options for automatic and immediate relief.

It’s possible to seek discharge of student loan debt, but that’s a more complicated and complex process, as we’ll dive into further. There are other options to lower payments, though.

Student loan debt relief

Even if you aren’t eligible for complete forgiveness of your student loan debt, you can still take advantage of other plans to lower your monthly repayments.

The SAVE plan, as mentioned above, offers some borrowers the ability to lower their monthly payments based on their income — even if they don’t qualify for full forgiveness. This can provide some significant relief to those who need it.

It’s also possible to refinance student loans in much of the same way that other loans are refinanced. In this option, you would be replacing your old loan with a new one that has more favorable terms.

If you’re able to lower your interest rate, it could help to reduce your monthly payments. At the same time, if you refinance to a private loan servicer, you would lose any benefits that the federal government provides or may provide in the future.

It also may be possible to seek temporary deferment of repayment depending on your situation. If this is something you’d like to look into, it’s best to reach out to your loan servicer directly.

Student loans and bankruptcy

Until recently, getting student loans discharged through bankruptcy was a very difficult process. That’s because student loan debt is treated differently than other types of debt in bankruptcy proceedings.

In the 1970s, Congress passed legislation that put protections in place, because they were afraid that wealthy people would eventually abuse the system to get their student loan debt discharged. 

This meant that in order to get student loans discharged through bankruptcy, a person had to sue the federal government and try to prove that the loan was causing them “undue hardship.”

That was a significant hurdle to overcome, not only because it was hard to prove the “undue hardship” but also because it was expensive to do so. 

A law professor at Villanova University actually conducted a study in 2020 that found that only a little more than one in 1,000 people who declared bankruptcy and had student loans were able to get that debt discharged.

Approval for student loan discharges in bankruptcy

In November 2022, the Department of Education updated rules to make it easier for student loan debt to be discharged through bankruptcy. Now, borrowers who wish to have their student loan debt discharged through bankruptcy have to fill out a form that’s 15 pages long. Then, attorneys working for the government will use new guidelines on exactly what would qualify as “undue hardship.”

This has made the process simpler and more effective for borrowers. In fact, in November 2023, the DOE reported that 99% of people who used this new process were successful in getting their student loan debt discharged through bankruptcy.

While that only included a little more than 600 people total, the department believes an increasing number of these filings will be made in the future.

Final extension of the student loan repayment pause

During the COVID-19 pandemic, the federal government instituted a pause on all federal student loan repayments. That stood in place for more than three years, but came to an end in September 2023. 

Interest began accruing again on September 1, while repayments resumed on October 1.

When the payments were put on pause, interest rates were dropped to 0% as well, so that debt wouldn’t continue to rack up as borrowers didn’t make payments. Once those payments resumed, the interest rates returned to whatever their fixed rate was.

There is a 12-month “on-ramp” as part of this resumption of payments, though. Through September 30, 2024, borrowers who aren’t able to make repayments won’t default on their loans. However, interest still accrues if payments aren’t made, adding to the total outstanding debt.

This has caused many borrowers to be faced with the daunting challenge of fitting student loan repayments back onto their already tight budgets.

Challenges for borrowers seeking loan forgiveness through bankruptcy

While the Department of Education has made it easier for borrowers to seek loan forgiveness through bankruptcy, it’s still not as straightforward as having credit card debt discharged. It’s not an automatic that this debt will be forgiven. The federal government still needs to agree that the loan is causing “undue hardship,” even if the guidelines by which they make that decision have been relaxed.

That’s why it’s important to work with an experienced bankruptcy law firm if you have student loan debt that you wish to discharge. Babi Legal has a team of experienced professionals who can help you navigate the complicated web of student loan debt forgiveness, giving you a better chance of having it discharged through bankruptcy.

Further student loan forgiveness reading

Babi Legal has provided additional reading on student loan forgiveness for you to review, including the impact of bankruptcy on student loans, and the pros and cons of student loan forbearance.