Bankruptcy and Student Loans: Can You Discharge Your Student Debt?
Student loan debt is a major burden for many Americans. You’ve been making payments for years, but it feels like you’re barely making a change. Well, you’re not alone. Millions of Americans are in the same boat.
But what happens when you simply can’t keep it up? Can you discharge your student loan debt through Bankruptcy?
In this article, I will explain everything you need to know about student loans and Bankruptcy.
Let’s dive in.
Bankruptcy: What You Need to Know
Let’s start with the basics. Bankruptcy is a legal process that can help people and businesses get out of debt. However, you must know that filing for Bankruptcy doesn’t automatically mean your student loans will be discharged.
While Bankruptcy can help with credit card debt, medical bills, and personal loans, student loans are treated differently. For students, there are two main types of Bankruptcy.
Chapter 7 bankruptcy: Involves selling off some of your assets to pay off your debts. It’s a faster process, but it could mean losing some of your belongings.
Chapter 13 Bankruptcy: Allows you to create a repayment plan that extends over 3-5 years. You can often keep your assets while paying off your debts.
Now you know about the types, let’s see what to do next.
How to File for Student Loan Bankruptcy?
Know that when it’s possible to discharge student loan debt through Bankruptcy, it’s not easy and requires meeting some criteria. Here’s an overview of the process:
File for Bankruptcy
You’ll need to file for either Chapter 7 or Chapter 13 bankruptcy. Each chapter has different eligibility requirements and consequences.
Consult with a bankruptcy attorney to check which chapter is suited for your financial situation. Here are some of the best bankruptcy attorneys I can personally recommend:
Kevin S. Neiman: Denver, Colorado
King&King Law, LLC: Atlanta, Georgia
Gregory K. Stern, P.C.: Chicago, Illinois
Abrams Fensterman LLP: New York
File an Adversary Proceeding
We are discussing a separate lawsuit in your bankruptcy case where you argue that repaying your student loans would cause you “undue hardship.”
The “undue hardship” standard is a high bar to meet and requires showing that you and your dependents will suffer substantial financial difficulty if forced to repay the loans.
The Role of the Department of Justice
In these cases, the DOJ represents the federal government and may negotiate a settlement or oppose your discharge request.
The Challenge of Discharging Student Loans
Student loans come under a particular category of debt that’s usually non-dischargeable in bankruptcy. According to the U.S. Bankruptcy Code, educational loans are only dischargeable if the borrower can demonstrate “undue hardship”—a stringent legal standard that varies by jurisdiction.
The test most commonly used to check undue hardship is the Brunner Test, which involves three criteria:
Poverty: The borrower cannot maintain a minimal standard of living if forced to repay the loan.
Persistence: The financial hardship is likely to persist for a significant portion of the repayment period.
Good Faith: The borrower has made efforts to repay the loan, such as seeking deferments or exploring alternative repayment plans.
Because of the subjective nature of this test, courts have traditionally been reluctant to discharge student loans, leaving many borrowers feeling trapped in debt even after declaring bankruptcy.
How to Prove Undue Hardship?
While proving “undue hardship” is the main challenge, there are a few situations where you have a better chance of getting your student loans discharged:
Private vs. Federal Loans: Private loans are often easier to discharge than federal loans. If your private loan wasn’t used for education as defined by bankruptcy laws, you might not even need to prove undue hardship.
Loan Purpose: Loans used for things other than education, like bar exam prep or residency training, might not count as student loans and could be easier to get rid of.
Serious Financial or Medical Problems: You might have a stronger case for undue hardship if you’re dealing with:
- severe medical condition
- disability
- major financial crisis
Showing Good Faith: If you can prove you’ve been trying to repay your loans or have been open with your lender about your financial situation, the court might look more favorably on your case.
Are There Any Alternatives Available?
The good news is, yes! Bankruptcy isn’t the only answer. There are other ways to manage your payments without such a drastic measure. Here are a few options:
Income-Driven Repayment Plans: These plans adjust your monthly payments based on your income and family size. After a certain number of years, any remaining debt might be forgiven.
Public Service Loan Forgiveness: If you’re working in a public service job, you could qualify for loan forgiveness after 10 years of qualifying payments.
Loan Rehabilitation or Consolidation: These strategies can help you get back on track with your loans, potentially improving your credit score and simplifying the repayment process.
Hardship Deferment or Forbearance: If you’re going through a tough financial patch, you can temporarily pause your payments. Remember, that interest might still accrue during this time.
Recent Changes in Student Loan Bankruptcy
Lately, there’s been a growing awareness of the heavy burden student loans place on borrowers. For example, bills like the FRESH START Through Bankruptcy Act, currently in Congress, aim to make federal student loans dischargeable after 10 years without requiring the strict undue hardship test.
Final Thoughts
For those drowning in student loan debt, the best course of action is to be proactive. I recommend consulting a bankruptcy lawyer and researching repayment plans.
While it might be challenging, it’s not unbeatable. With the right strategy, you can regain control of your finances and start fresh.
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