Student Loan Bankruptcy: The Process
For many people, student debt is the one debt they can’t seem to overcome no matter what they do. They’ve made payments when their financial situation allowed. Asked for deferments and forbearances when they couldn’t. They’ve applied for loan forgiveness and lower interest rates. And they’ve even asked for options to reduce their outstanding student loan debt via settlement.
Nothing has worked thus far.
It’s at that point that filing student loan bankruptcy becomes an option.
Should You File Student Loan Bankruptcy
While student loan bankruptcy discharge is possible, its likely only worth exploring in the following instances:
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Youve exhausted all payment options. If you have federal student loans, see if you can afford income-driven repayment or qualify for a loan forgiveness program. Private student loans have fewer options for struggling borrowers. Still, call your lender or servicer and ask whether they can temporarily lower your payment or interest rate.
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Youre past-due on your student loans. If;you haven’t missed;payments, youll likely have a hard time proving your loans are causing undue hardship. Bankruptcy makes more sense in instances of student loan default especially if you have defaulted on private student loans and your lender is suing you in an attempt to garnish your wages.
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You have no pathway out of default. Federal student loans have options to get out of default, including loan rehabilitation and consolidation. If youve defaulted on a loan multiple times, you may have exhausted these options.
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These situations are no guarantee a bankruptcy court will discharge your student loans, but it has happened for some borrowers. A study published in the American Bankruptcy Law Journal in 2012 found that, in 207 bankruptcy cases in which debtors included their loans, 39%;won full or partial student loan discharges.
What To Know About Bankruptcy
There are two types of bankruptcy: Chapter 7the most commonand Chapter 13. In both cases, if youre successful in filing, you wont have to repay certain debts, and wage garnishment and other debt collection activities will end.
Chapter 13 bankruptcy gives filers who have a consistent income a payment plan to pay off debts within three to five years. The remaining debt is discharged after that time. Under Chapter 7 bankruptcy, theres no payment plan, and discharge can happen sooner, but your eligible assets will be sold to pay off your debts. After that, any remaining debt will be discharged.
In both cases, theres a downside: The bankruptcy will appear on your credit report for 10 years if you file for Chapter 7 and seven years if you file for Chapter 13. And unless you choose Chapter 13, you might also lose the collateral you put up to back secured debt, like a mortgage, that hasnt been paid and has a lienor a legal claimagainst it.
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The Undue Hardship Exception
To have your student loan discharged in bankruptcy, you must demonstrate that it would be an undue hardship for you to pay them. The test for determining undue hardship varies between courts. Also, many courts look at the undue hardship test as all or nothingeither you qualify to get the whole loan discharged, or you don’t. Other courts have discharged a portion of a debtor’s student loan.
Regardless of the test used, most courts are reluctant to discharge a student loan. However, if you have very low income or your loan is from a for-profit trade school, you might have a better chance.
File For An Adversary Proceeding
Whether you hire a lawyer or go it alone, youll need to file for an adversary proceeding, which is a hearing to determine the possibility of discharging your student loan debt. Youll have a hearing in bankruptcy court and your creditors are required to be present. At that hearing, youll need to provide evidence that you qualify for undue hardship standards.
This is part of the process that is unique to bankruptcy and student loans. Note that you cant proceed with a student loan bankruptcy without this step.
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Cost To File Bankruptcy On Student Loans
The bankruptcy court does not charge court fees to file student loan bankruptcy. However, the fee you paid your bankruptcy attorney to file Chapter 7 or Chapter 7 did not include the attorney filing an adversary proceeding for student loans. Therefore, unless you find an attorney willing to file the AP at a reduced rate, you may have to spend several thousand dollars hiring a student loan bankruptcy lawyer.
How Do I Challenge My Student Loan Debt In Bankruptcy
Once you have filed for bankruptcy or we have re-opened a prior bankruptcy, the next step to discharge student loans in bankruptcy is to file a separate action within the bankruptcy case, known as an adversary proceeding. This adversary proceeding is similar to a lawsuit in that it will start with the filing of a complaint and can proceed through a trial and appeal, if necessary.
This process, within a bankruptcy, can be very difficult and our highly specialized student loan lawyers are some of the few attorneys that understand how to best proceed with challenging student debt through an adversary proceeding.
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Think Of Insolvency Waiting Periods As A Clock With A Start Date And An End Date
It is helpful to think of these waiting periods as a clock with a start date and an end date. The end date is straightforward: its the date that your Licensed Insolvency Trustee receives a Certificate of Appointment from the Court typically within one or two days of your filing for personal bankruptcy or making a consumer proposal.
The $64,000 question is: when is the start date of the 7-year and 5-year waiting periods?
There are a significant number of Canadians who waited several years before applying for a bankruptcy or making a consumer proposal who subsequently found out that they failed to have their student loan forgiven because they miscalculated the start date on the running of the 7-year waiting period under federal insolvency lawby a period of a few days, weeks or months.
What Alternatives Could Help Me Pay Off My Student Loan Debt Without Declaring Bankruptcy
Fortunately, there are alternative options to declaring bankruptcy.
For short-term solutions for federal student loans, deferring the loans or going into forbearance, could be options to consider if you qualify. These options allow borrowers to temporarily pause their student loan payments.
Unlike declaring bankruptcy, federal student loans in deferment or forbearance generally dont negatively affect your credit.
Another option for federal student loans is switching to an income-driven repayment plan, which ties your monthly payments to your discretionary income. If your income is low enough to meet the thresholds for these plans, this could bring payments down significantly, though interest will still continue to accrue.
Private student loan lenders may offer temporary assistance programs that could help borrowers who are struggling to make payments on a temporary basis.
It may also be worth negotiating: One option could be to contact the loan servicer or lender and ask for additional repayment options. In general, servicers or lenders would rather receive a smaller sum of money from you than nothing, so its typically in their best interest to work with you.
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Question Whether The Student Loans Are Qualified Education Loans
If a loan is not a qualified education loan, it may be dischargeable in bankruptcy without requiring an undue hardship petition and adversarial proceeding. You should challenge whether the loan satisfies the requirements to be considered a qualified education loan.
Qualified education loans must have been borrowed solely to pay for qualified higher education expenses of an eligible student who was enrolled on at least a half-time basis and seeking a degree, certificate or other recognized education credential at an eligible institution of higher education.
A refinance of a qualified education loan is also considered a qualified education loan.
The Brunner Test Involves Three Prongs:
- You must currently be unable to repay the student loans and maintain a minimal standard of living for yourself and your dependents.
- The circumstances that prevent you from repaying the student loans must be likely to continue for most of the repayment term of the loans.
- You must have made a good faith effort to repay the student loans, including using options for financial relief, such as deferments, forbearances and income-driven repayment.
The Totality of Circumstances Test omits the third prong of the Brunner Test and is more flexible.
In addition, the borrower must file the undue hardship petition in an adversarial proceeding, where the lender can challenge the claim of undue hardship.
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How To Qualify For A Federal Student Loan Bankruptcy Discharge
In 2019, its never been easier to qualify for a Federal Student Loan Bankruptcy Discharge. Why? Because all sorts of recent legal battles have set precedents for discharging Federal student debt in bankruptcy.
And back on February 21st, 2018, one of the biggest signs of a sea change occurred when President Trumps Administration announced via Secretary of Education Betsy DeVos that they were looking for public comments on bankruptcy standards for student loan debt.
That may seem odd coming from the worst student loan couple in the countrys history, after all, this is the same pair who planned on scrapping the Public Service Loan Forgiveness Program and who have already attempted to kill off the Borrowers Defense Against Repayment Program, but perhaps theyve seen the light on the bankruptcy issue?
The conventional wisdom to current day has been that Federal Student Loans cannot be discharged via Bankruptcy, but the reality is that it is possible to wipe out your Federal loans by filing for Bankruptcy, its just extremely difficult .
In fact, this is one of the only cases where its easier to get rid of Private loans compared to Federal loans, and if youre interested in that, then be sure to check out my 2018 Guide to Private Student Loan Bankruptcy Discharge.
Havent There Been Cases Where People Still Got Rid Of Their Students Loans Through Bankruptcy
Absolutely. Though difficult, it is still possible to have student loans discharged through bankruptcy by meeting the undue hardship requirement. A 2011 study found that only 1 in 1,000 student loan borrowers who declared bankruptcy even tried to have their student loans discharged. However, those that did succeeded at a rate of 40%.
Section 523 of the Bankruptcy Code does not set out a specific test to determine what qualifies as undue hardship. The federal courts are split on what the appropriate standard should be for discharging student loan debt. The Second Circuit case, Brunner v. New York State Higher Education Services Corporation, established three requirements that determine whether undue hardship applies.
First, the borrower must demonstrate that if forced to repay the student loans, they will be unable to meet a minimal standard of living based on income and bills.
Second, the borrower must be unable to repay for a significant portion of the repayment period.
Third, they must have made good-faith efforts to repay the student loan.
If a bankruptcy court agrees that a borrower meets these three requirements, the court can discharge the student loan debt.
But bankruptcy courts in the Eighth Circuit and occasionally courts in the First Circuit reject Brunner and examine the totality of the circumstances instead.
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Want Help Filing Student Loan Bankruptcy Let’s Talk
The process to get a hardship discharge of your student loan debt can be intimidating. Not only do you have to file bankruptcy, but you also have to pass different tests and provide evidence of your current financial situation and reasonably reliable future income. On top of that, you have to show your inability to repay your loans will last for a significant portion of the repayment period of the student loans.
If all of this seems like a lot, let me help. I’ve helped many student loan borrowers just like you file student loan bankruptcy. Schedule a free 10-minute talk so we can discuss how I can help you do the same.
Stop Stressing.
Hey, Iâm Tate.
I’m a student loan lawyer that helps people like you with their federal and private student loans wherever they live.
Can You Discharge Private Student Loans In Bankruptcy Financial Options For Students
The following article is a summary prepared by the authors of various articles about bankruptcy. It is not intended as, and should not be read as, legal advice. If you feel you need to consider bankruptcy, you should contact an attorney in your area who is qualified to lead you through this complex and weighty decision. You should not rely on this article or any Internet article to guide your decision.
Contrary to conventional wisdom, a private student loan, much like a federal student loan, is dischargeable under the right circumstances and has been since 2005. Popular thought may lead you to believe that filing bankruptcy on your private student loans is hopeless, but thats not exactly true.
If you cant repay your student loans, or you do not qualify for public service loan forgiveness or flexible student loan repayment plans, such as an income driven repayment plan, extended repayment plan, or Pay As You Earn Repayment Plan , then bankruptcy may be an option to consider. This is especially true for borrowers who take loans out after , as Congress looks to end PSFL and other repayment programs.
As a student, you can also take advantage of credit cards intended just for students to begin building your credit and earning rewards. Check out Credit.coms expert guide to the best credit cards for students to earn cash back and save on things like books, dining, entertainment, and even electronics.
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Raising Defenses In Bankruptcy Proceedings
One final item to consider, though again you need to consult with an Attorney etc., etc., is that you might be able to Raise a Defense during your Bankruptcy case, which is kind of like using the Borrowers Defense Against Repayment Program, in that it allows you to claim that your school, your lender, or your student loan servicer did something illegal and that your debt shouldnt be valid in the first place.
If you can prove that one of these entities committed breach of contract, leveraged unfair or deceptive business practices, or perpetrated some kind of fraud against you, then you may be able to get a Judge to rule that you dont need to pay them back.
This isnt easy, and if youre going to head this route then Id suggest just going after the Borrowers Defense to Repayment Discharge in the first place, but its an option for people who didnt know about Borrowers Defense, or who ignored my NOT LEGAL ADVICE and proceeded to File for Bankruptcy when they had no hope of getting a discharge approved anyway, and who now are stuck in a hopeless process who need a Plan B with better potential outcomes than bleeding out in a bathtub.
Get A Bankruptcy Attorney
A borrower is more likely to obtain a bankruptcy discharge of their student loans if they are represented by an experienced attorney.
However, most bankruptcy attorneys are unwilling to pursue an undue hardship claim because these cases involve an adversarial proceeding, which are expensive and involve a lot more work. It can cost $10,000 or more to pursue an adversarial proceeding and borrowers who file for bankruptcy usually dont have the money to pay the lawyers fees. Lenders are also likely to appeal the decision, so a favorable decision is unlikely to be final.
Even if you dont have an attorney and are representing yourself pro se, always show up in court. If you dont show up when required, the lender can win the case by default.
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How The Bankruptcy Trustee Pays Your Student Loans
As you make your monthly payments to the Chapter 13 trustee, the trustee will forward a portion of your plan payment to your student loan lender. Whether that money will reduce your principal or only cover interest will depend on the terms of your loan. Interest will continue to accrue on your student loans while you are in Chapter 13.
Good Faith Efforts To Repay
The third factor that courts look at is whether you have made good faith efforts toward repaying your student debt. This is a measure of your efforts to obtain employment, maximize income, and minimize expenses. Some considerations that courts have taken into account include making payments when the debtor could, seeking deferment when necessary and negotiating an income-driven repayment plan. If you would qualify for an income-driven repayment plan, but you fail to sign up, this will be a negative factor for your case.
It is also important to note that the court will look to see if the student debt is a significant portion of your overall debt such that if you are able to discharge other debts in bankruptcy, you will free up money that can be used to pay off your student loans.
If you have consistently put in the effort to make payments and avoid missing payments at all costs, this can generally be an easier prong to prove. Nevertheless, when you are trying to discharge student loans in bankruptcy, it is critical to show you have made good faith efforts to repay.
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