Can you discharge a student loan through bankruptcy? Although it’s not the easiest process, yes, it is definitely possible. To either discharge federal, or private student loans in court you have to prove undue hardship.
Considering the statistic that about 4 out of every 10 Americans who file for bankruptcy are able to have their student loans discharged, only 0.1% of student loan borrowers actually attempt to do so.
However, if you do successfully file, your student loan debt may be partially, or even fully discharged. Though it’s important to know it doesn’t always work out that way. We’ll tell you everything you need to know before filing bankruptcy to discharge your student loan debt.
Can You File Bankruptcy on Student Loans?
The difficult process of filing bankruptcy on student loans is possible. To successfully discharge your student loan debt using bankruptcy, you first have to prove that you can’t pay back your student loans. That is without it creating a huge negative impact on yourself and any possible dependents.
This leaves the decision of interpreting your eligibility to the courts. The majority of, but not all federal courts of appeal evaluate your hardship using a precise set of standards.
These standards can be known as the Brunner Test. The Brunner Test was created as a result of a court ruling in 1987: Marie Brunner v. New York State Higher Education Services Corp.
The factors of the Brunner test are outlined by the U.S. Department of Education’s Federal Student Aid office and include three main points:
- You wouldn’t be able to maintain a basic standard of living if you had to pay back your federal student loans.
- Must prove that the hardship will last for a substantial portion of your repayment period.
- Have you honestly tried to repay your federal student loans before this point?
Other courts rely on somewhat different standards. This is known as the”totality of circumstances”. This standard looks at your past, present and future financial situations. Including reasonable living expenses and other factors considered relevant to bankruptcy proceedings.
In Washington, D.C. there have been movements to create more clear qualifications in order for citizens to discharge their student debt through bankruptcy. Recently, the House Judiciary Committee introduced the Consumer Bankruptcy Reform Act of 2020 that would replace Chapter 7 and Chapter 13 bankruptcy proceedings with a Chapter 10 that makes discharging student debt easier.
As of now, it’s up to each bankruptcy court to figure out their own standards. Meaning results of discharging student debt through bankruptcy vary.
For now, since it is up to each bankruptcy court to interpret the standards, the results can vary. Currently, it is up to courts to determine what qualifies for undue hardship and there is no federal standard.
The Process of Student Loan Bankruptcy Discharge
1. Clarify your situation
If you’re set on erasing your student loan debt through filing for bankruptcy, the procedure you must follow is specific.
Having all of your student loan records and also personal financial paperwork is needed. Being organized is the best way to ensure you’re prepared to make your case.
The process of filing bankruptcy for your student loans doesn’t make a difference whether they’re federal, or private. It’s important to know that if you’re past due on your loan payments, or if you’ve missed several, it might be easier to prove undue hardship.
2. Consider hiring a lawyer
Technically, you do not need to hire a lawyer when filing bankruptcy on student loans. Though, at Ruesch and Reeve Legal, we highly recommend you do so.
Considering how complex the process can be, hiring a professional lawyer can help you file correctly. Increasing your chances of getting your student loan debts discharged through filing bankruptcy.
The process requires determining which bankruptcy type you’ll file and submit. Doing that process alone means not only your time being used, but possible incorrect filings and losing your case.
If you don’t know where to find a qualified lawyer, at Ruesch and Reeve we’re here to help. We want to give you the best outcome possible and make the process easy for you. Making sure you pick a lawyer that specializes in bankruptcy.
If you do choose to handle the case yourself, make sure you take all of the right steps and don’t expel your chances of a proper outcome.
3. File for an adversary proceeding
Whether you do hire a professional lawyer, or do it yourself, you have to file for an adversary proceeding. Meaning a hearing to determine the possibility of your student loan debt being discharged.
The hearing will be in bankruptcy court and your creditors will be present. At this hearing, evidence that you qualify for undue hardship will be required. This part of filing for bankruptcy to discharge student loans is unique to each situation.
You cannot move forward with your filing if you don’t first do this step.
4. Decide which type of bankruptcy to file for
Next, whether on your own or with the lawyer you’ve hired, you have to decide what type of bankruptcy to file for. Whether it’s Chapter 7, or Chapter 13 bankruptcy.
Student loan bankruptcy can be addressed in either Chapter 7, or Chapter 13. Though, it’s approached differently in each category.
We’ll help you break down the difference between the two chapters, some of their qualifications and how they apply to student loan debt:
Chapter 7 bankruptcy
- You must prove you have little disposable income available to pay off your debt.
- Most unsecured debt can get wiped out.
- Student loan debt may be eligible for discharge.
- The process can take about four months.
Chapter 13 bankruptcy
- You have some income to use to repay some of your debts.
- Your debt will be restructured, and some of it will need to be repaid.
- Student loan debt may be eligible — but your repayment will be restructured, not discharged.
- The court process can last from two to six months, and the repayment plan can take three to five years.
Please note that personal bankruptcy comes at a harsh cost. It can damage your credit for years to come. On your credit report, a Chapter 7 bankruptcy filing will remain intact for 10 years. Chapter 13 bankruptcy stays for 7 years.
This can definitely make it difficult for you in the future with things like securing loans, or credit, as well as creating high interest rates.
That said, if you are falling behind in debt, then your credit score has probably already been affected. As well as the chance that you are successful in your bankruptcy filing, your creditors can no longer garnish your wages.
Those things considered, bankruptcy may provide you with a fresh start by discharging your student loan debts.
5. Get an outcome
If you do prove undue hardship, your student loans can be either completely discharged, partially, or even just restructured.
Say your loans are fully discharged, you will no longer have to make payments on your existing student loans. If only partially discharged, you’ll still be held accountable for paying the remainder.
Lastly, if they’re restructured, you might be required to fully repay your student loans. But the repayment terms will be redone and should be easier for you to manage. That includes a lower interest rate.
Have You Considered Other Options?
Are your student loan debts dischargeable through bankruptcy? Possibly. Should you use bankruptcy to discharge them? That depends on each person’s situation.
Using bankruptcy to discharge student loans is a complicated filing process. Not only that, but it’s also intrusive and extensive. Filing for any sort of bankruptcy should always be a last resort.
There are other alternatives to finding a solution on student loan payments. For example, any federal loans come with other options. Such as income-driven repayment plans and deferment, or forbearance.
These alternatives could possibly provide you relief from student loan payments, without having to file bankruptcy.
There’s also the option to apply for forgiveness. This option is available to those who work for certain public service organizations. That could be government agencies, or even nonprofits.
Before filing bankruptcy on student loans we recommend you try to fight against a system that makes it difficult to discharge your debt. Also be sure to research your other debt repayment options for student debt relief before following through with bankruptcy.
Hire a Professional
If you are going to follow through with filing bankruptcy to discharge your student loan debt, make sure you hire the right person for the job.
At Ruesch and Reeve Legal, we’ll help you file for bankruptcy in Hurricane, Utah. We make the process easy for our clients, so they can get the best outcome possible.
If you’re struggling with student loan debts and have expelled all other options, we want to help. Ruesch & Reeve Legal can guide you through your bankruptcy options so that you know every advantage and disadvantage of bankruptcy when deciding if bankruptcy is right for you.
Contact us today, at 1-435-635-7737