- Bankruptcy is one of the most common motions an individual can use in order to permanently get rid of loans. A person files for bankruptcy at a local court and includes necessary information like income level and total debts. During the process of the bankruptcy, the court will cancel loans that are not paid off through the sale of assets or through a payment plan. This type of cancellation is advantageous because it does not incur the same forgiveness-based income tax as private forgiveness does.
- In some cases, during the process of the bankruptcy, an individual can also file for a further cancellation of a particular secured loan, typically a mortgage. While these would not normally be cancelled, if the borrower can prove that there is not enough value in an asset to meet the demands of the debt at all (which can occur with a second mortgage), then the court will strip the lien from the debt. This removes the lender's ability to collect payment and effectively cancels the loan.
- When it comes to student loans, the debtor must file a completely separate motion alongside the bankruptcy in order to have them fully discharged. A student loan discharge rarely occurs because they are backed by the government and have a higher priority than any other type of debt. The court will carefully examine the information provided by the debtor and may decide to fully cancel the loan in certain circumstances.
- In order to cancel a student loan or a similar type of loan that requires a specialized motion, the debtor must prove that paying off the loan would cause severe financial hardship. This means that the debtor must submit complete and accurate information on both income and expense levels, along with the ways that the debtor has tried to pay back the loan in the past and the expected time frame of current debt levels.
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