It is a common misconception that student loans are immune to bankruptcy discharge, but that is not entirely true. Although challenging, it is possible to discharge federal student loan borrowers’ loans through bankruptcy under certain circumstances.
If you can successfully demonstrate undue hardship, then through the successful filing of an adversary proceeding in the bankruptcy case, your student loans may qualify for complete discharge, partial discharge, or restructuring.
With a complete discharge, you will no longer be obligated to make further payments toward your student loans. In the case of partial discharge, you will be responsible for paying the remaining portion of your loans.
However, if your loans are restructured, you may still be required to repay them, but you will receive new repayment terms designed to be more manageable, including a lower interest rate.
If you have explored all other alternatives and meet the eligibility criteria for discharge, consider pursuing this route. Here is some vital information to keep in mind if you are contemplating how to file for bankruptcy on your student loans.
Obtaining Student Loan Discharge in Bankruptcy
To obtain a bankruptcy discharge for your student loan debt, you must establish that repaying the loans would cause significant harm to you and your dependents. This requires demonstrating that the financial burden is so severe that it would have an overwhelmingly detrimental impact on your life.
The Brunner Test
Most federal courts of appeal use the Brunner Test, a set of criteria established in 1987 to determine your eligibility for student loan discharge in bankruptcy.
The U.S. Department of Education’s Federal Student Aid office outlines the three main factors of the Brunner Test. These factors collectively play a vital role in determining your eligibility for student loan discharge through bankruptcy.
Firstly, you must demonstrate that repaying your loans would prevent you from maintaining a basic standard of living. This means the financial burden would be so severe that meeting essential needs would become challenging.
Secondly, you need to establish that this hardship will persist for a significant portion of your repayment period.
Finally, it is crucial to show that you have sincerely tried to repay your federal and private student loan borrowers’ loans before considering bankruptcy.
Other Court Options to Discharge Student Loan Payments Through Bankruptcy
In 2018, legislation called the Higher Ed Act was introduced in Congress. This legislation broadened the definition of undue hardship, enabling many student loan borrowers to qualify for reduced or discharged student loan obligations.
Also, the Department of Education recently requested public comment regarding the factors used to assess undue hardship and whether the two standards create disparities for borrowers seeking to discharge their student loan debt.
This request invites input from the public to evaluate the existing criteria and consider whether any inequities exist in the process for borrowers seeking relief from their student loan obligations. The aim is to gather feedback and insights to ensure a fair and consistent approach to evaluating undue hardship claims.
On the other hand, the 1st U.S. Circuit Court of Appeals and the 8th U.S. Circuit Court of Appeals use the totality of circumstances. This standard considers your past, present, and future financial resources, reasonable living expenses, and other pertinent factors concerning the bankruptcy process.
Should You File Chapter 7 or Chapter 13?
Student loan bankruptcy can be approached through Chapter 7 or Chapter 13 bankruptcy.
To qualify for Chapter 7, you need to demonstrate that you have limited disposable income available to repay your debts. In this type of bankruptcy, most unsecured debts, including student loans and credit card debt, can be discharged.
Discharging student loans in Chapter 7 can be challenging and requires meeting specific criteria. The Chapter 7 bankruptcy process typically takes around four months to complete.
The House Judiciary Committee introduced the Consumer Bankruptcy Reform Act of 2020 with the intention of fewer consumer debts and streamlining the process of discharging student debt by replacing Chapter 7 and Chapter 13 bankruptcy proceedings with a new Chapter 10.
However, at present, the interpretation of standards by individual bankruptcy courts can lead to varying outcomes. The determination of undue hardship and the absence of a federal standard leave it to each court’s discretion. That is a powerful reason to find a reliable bankruptcy attorney to work by your side.
Proving Undue Hardship for Student Loans
Borrowers are responsible for providing evidence that meets the court’s requirements for proving undue hardship. However, establishing dire financial straits is more complex than it may seem.
To successfully demonstrate undue hardship, you must be in an exceptional circumstance. This often includes individuals facing health issues, receiving disability benefits, or experiencing an extreme and unchangeable financial situation.
Start With Putting Paperwork In Order
If you want to use bankruptcy to eliminate your federal student loan debt, you must be well-prepared by gathering all your student loan documents and personal financial records. Being organized will significantly improve your chances of successfully presenting your case.
Federal Student Loans or Private Student Loans?
Whether they are federal or private loans doesn’t matter when filing for bankruptcy on student loans. If you have fallen behind on your monthly payments and have missed some, it will be easier to show that you are facing significant financial hardship that makes it challenging to repay the loans.
Seek Legal Assistance to Eliminate Your Student Debt
Although hiring a lawyer when filing for bankruptcy on student loans is not mandatory, it is crucial to recognize the complexity of the process. Bankruptcy entails deciding the appropriate type of bankruptcy to file and initiating an additional legal action known as an adversary proceeding.
Attempting to have your student loans discharged in bankruptcy alone could result in additional time, incorrect filings, and the risk of an unfavorable outcome. By working with a knowledgeable lawyer, you can navigate the intricacies of the process more effectively, increasing your chances of success and avoiding potential pitfalls.
The Adversary Proceeding
This distinctive aspect of the bankruptcy and student loan journey is crucial, as it sets this process apart from other forms of bankruptcy. Whether you enlist a lawyer’s support or take on the task independently, be prepared for a crucial step called the adversary proceeding.
This hearing serves as a pivotal moment where the possibility of discharging your student loan debt is determined. Picture yourself in a bankruptcy court, with your creditors present, as you present evidence to establish your eligibility based on undue hardship criteria.
Exploring Non-Bankruptcy Options for Student Loan Debt
There are alternatives to filing for bankruptcy for student loans. For instance, federal loans offer income-driven repayment plans, deferment, and forbearance options. These programs can provide relief without resorting to bankruptcy.
Student Loan Forgiveness
You can also seek forgiveness by applying for an income-driven repayment plan or Public Service Loan Forgiveness (PSLF). PSLF is specifically for individuals employed by eligible public services organizations like government agencies or nonprofits.
Hardship Programs For Student Loan Payments
Contact your lender to discuss potential loan forgiveness programs if you have a private student loan. Consider sending a certified letter to your private loan servicer explaining your financial difficulties, income, and affordable payment amount. Your student loan servicer might offer a repayment plan that provides relief. If you prove undue hardship, they can scheme your monthly payment.
Student Loan Bankruptcy Consequences
Filing for bankruptcy can impact your existing student loans and restrict your ability to obtain new ones. Filing for bankruptcy can affect your existing loans and limit your ability to get new ones.
While it may be challenging to eliminate student loans through bankruptcy, the potential debt relief you could receive from filing bankruptcy may outweigh the difficulty. Consult with a bankruptcy attorney or a specialized lawyer in student loan bankruptcy for guidance and assistance.