Tiffany Haney
To put student loans into bankruptcy, you must file for Chapter 7 or Chapter 13 bankruptcy. This can be a difficult process, and it is recommended that you talk to a professional first. You will then need to file an adversary proceeding, which is a separate lawsuit within your bankruptcy case, to prove that repaying your loans would cause undue hardship. This is a challenging criterion to meet, and the outcome will depend on your location and the judge you get. If you can prove undue hardship, the judge can discharge your loans, change the terms to make them easier to repay, or decide on a partial discharge.
| Characteristics | Values |
|---|---|
| Difficulty in discharging student loan debt in bankruptcy | Not impossible, but difficult |
| Types of bankruptcy | Chapter 7 or Chapter 13 |
| Adversary proceeding | Required to file for student loan bankruptcy |
| Undue hardship | Required to prove for bankruptcy discharge |
| Cost of litigation | Filing fees and attorney costs |
| Type of student debt | Federal loans are harder to discharge than private loans |
| Interest | May continue to accrue with Chapter 13 repayment plan |
| Future ability to pay | Demonstrate hardship will continue for a significant portion of the loan period |
| Good faith effort to repay | Contact loan servicer or Department of Education prior to filing |
| Brunner test | Used by bankruptcy courts to determine undue hardship |
| Alternatives to bankruptcy | Deferment, forbearance, income-driven repayment plans, or negotiating a settlement |
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What You'll Learn
Proving undue hardship
The next step is to gather evidence. This is where you prove undue hardship. Most courts use the Brunner Test, which originated from a 1987 case where Marie Brunner attempted to discharge her student loan debt soon after completing her master's degree. The Brunner Test has three parts:
- Prove that your current income and expenses prevent you from maintaining a minimal standard of living if you have to repay the debt
- Prove that your financial situation is likely to persist for a significant part of the repayment period, forcing the judge to predict your future
- Prove that you have made a good faith effort to repay the loan
Other tests used by courts include the Totality of Circumstances Test, which is used in the Eighth Circuit to consider relevant facts and circumstances rather than consistent attempts to reduce expenses, find employment, maximize income, and other good-faith efforts to repay.
Where you live can also affect how courts consider your student loans for discharge in bankruptcy proceedings. For example, the Fifth Circuit (Mississippi, Louisiana, and Texas) has a reputation for applying the Brunner Test so strictly that proving undue hardship is almost impossible.
If you can prove that your private student loan is a nonqualified education loan, you may be able to get it discharged under ordinary bankruptcy proceedings without proving undue hardship. Nonqualified education loans include loans paid directly to the debtor that exceed the cost of attendance, for students who attended school less than half-time, for unaccredited colleges, trade schools, or foreign schools, or for living expenses during a period of residency or while studying for professional exams.
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Chapter 7 or Chapter 13 bankruptcy
To put student loans into bankruptcy, you must first file for Chapter 7 or Chapter 13 bankruptcy. This is done by filing an adversary proceeding, which is a separate lawsuit within your bankruptcy case. The court will then evaluate your finances to determine whether or not repaying your student loans would cause an "undue hardship".
Chapter 7 bankruptcy involves the complete liquidation of all personal assets to repay debts. To file for Chapter 7, your income must be below the median in your state. If your income is sufficient to repay 25% or more of your debt, you will be required to file under Chapter 13.
Chapter 13 bankruptcy involves reorganizing and lowering your debt. There is no income requirement for Chapter 13, but you must make payments on your debts according to a plan set by the bankruptcy court for 3 to 5 years before the court cancels the remaining debt. Student loans are treated as nonpriority unsecured debts, and you are not required to pay them off in full through your Chapter 13 repayment plan.
It is difficult to discharge student loan debt in bankruptcy, and it is generally only granted in rare circumstances, such as severe disability. However, it is not impossible, and both federal and private student loans can be discharged. If you have federal loans, there may be alternatives to bankruptcy that can discharge your debt.
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Adversary proceeding
To file for student loan bankruptcy, you must first file for Chapter 7 or Chapter 13 bankruptcy. An adversary proceeding is a separate lawsuit within your bankruptcy case, filed to demonstrate that repaying your student loans would cause undue financial hardship. The court will evaluate your finances and determine whether or not repayment would be an "undue hardship".
The adversary proceeding involves a 15-page form that outlines your financial circumstances and explains how repaying your student debt would qualify as an undue hardship. It is worth noting that the requirements for discharging student loans under bankruptcy are stringent compared to other types of debt. With Chapter 7 bankruptcy, you can initiate the adversary proceeding immediately after filing your case. Some states may also allow you to file an adversary proceeding on a closed Chapter 7 bankruptcy case. With Chapter 13 bankruptcy, you may be allowed to file the adversary proceeding early, depending on your state. However, if you win, your student loans will only be discharged once you have made all the payments required by your plan.
The cost of litigation is an important factor to consider. Filing for bankruptcy involves fees, and you may need to hire an attorney, which can be expensive. If you can afford an attorney, the court may question your eligibility for bankruptcy. Additionally, federal student loans have more benefits and protections, making them easier to repay and more challenging to discharge in bankruptcy compared to private student loans.
If you have federal loans, there may be alternatives to bankruptcy to discharge your student debt. For example, you can contact the Department of Education or your loan servicer to discuss payment options or apply for loan forgiveness or cancellation based on specific circumstances, such as attending a for-profit college that misrepresented job prospects and earning potential.
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Federal vs private student loans
Federal student loans are offered by the federal government, while private student loans are issued by banks, credit unions, and online lenders. Federal loans are usually the better option for most borrowers due to their low eligibility criteria and unique borrower protections. They are also generally less expensive than private loans, with lower interest rates and valuable borrower protections, such as income-driven repayment plans and student loan forgiveness programs. Federal loans also do not require a credit check, and in the event of the borrower's death or disability, the loan balance is automatically discharged.
Private student loans, on the other hand, can be a good option if federal loans won't cover your tuition or if you have strong credit. They can help cover the remaining costs after exhausting all federal loan options. Private loan borrowing limits vary by lender, but you can generally borrow up to your school's cost of attendance. Private loans can come with either fixed or variable interest rates, and the interest rates depend on your credit score.
To file for student loan bankruptcy, you must first file for Chapter 7 or Chapter 13 bankruptcy. The court will then evaluate your finances to determine whether repaying the loans would cause undue hardship. If the court decides that you have an undue hardship, the judge can change the terms of your loans, such as lowering your interest rate. Bankruptcy is often considered a last resort, and it is difficult to discharge student loan debt in this way.
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Bankruptcy alternatives
Bankruptcy can be a stressful process, and it is considered a last resort for good reason. It can be expensive, with filing fees and lawyer fees adding up to a substantial sum, and it can also negatively impact your credit score, making it difficult to borrow money or obtain credit cards for up to 10 years. Therefore, it is important to consider alternatives that can help you manage your debt without resorting to bankruptcy. Here are some options to explore:
Debt Management Plans
Debt management plans involve working with a credit counselling company that will help you make regular payments to your creditors. These plans can provide convenience, lower credit card interest rates, waive late and over-limit fees, and stop collection activities. However, there is typically a one-time setup fee and an ongoing monthly fee for these services.
Debt Consolidation
Debt consolidation allows you to pay off multiple debts by taking out a loan or accessing a credit line. This can be done through a personal loan, home equity loan, or a balance transfer credit card. By consolidating your debts, you may be able to secure a lower interest rate and more favourable repayment terms.
Debt Settlement
Debt settlement involves negotiating with creditors to pay less than the full amount owed. You can work with a debt settlement company or contact creditors directly to explain your financial situation. Creditors may be willing to accept partial repayment rather than risk losing the entire amount. However, debt settlement typically requires you to be in default, and it may take 2-3 years to accumulate enough funds to settle your debts.
Selling Assets and Tightening Budget
If you have valuable assets, consider selling them to reduce your debt burden. Additionally, reviewing your expenses and creating a budget can help you identify areas where you can cut back on spending, potentially freeing up more money to put towards debt repayment.
Income-Driven Repayment Plans
If your income is insufficient to make debt payments, consider enrolling in an income-driven repayment (IDR) plan. This option can lower your monthly payments and make your debt more manageable.
Deferment or Forbearance
In some cases, you may be able to pause your debt payments through deferment or forbearance options offered by your creditors or loan servicers. This can provide temporary relief while you work on improving your financial situation.
Remember, each person's financial situation is unique, and it is always a good idea to seek professional advice from financial experts, credit counselors, or legal professionals to find the most suitable alternative for your specific circumstances.
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Frequently asked questions
Yes, it is possible to file for bankruptcy on student loans, though it is a complex process.
You'll have to file an adversary proceeding, which is a separate lawsuit within your bankruptcy case. You will need to prove undue hardship and provide evidence that repaying your student debt would put you in financial difficulty.
If your student loans aren't discharged, you may still have alternatives to getting your student debt discharged without filing for bankruptcy. You can also consider other options such as loan cancellation or forgiveness programs.
Chapter 13 bankruptcy is known as a "wage earner's plan" and is specifically for individuals with a regular income. It involves creating a plan to repay all or a portion of your debt over three to five years, with any remaining balances being discharged.
Hiring a local bankruptcy lawyer can help you navigate the process and protect your assets. It is important to research and understand your specific circumstances and the potential impact on your financial situation.
