How Difficult Is It To Discharge Student Loans In Bankruptcy
Congress decided in 1976 that federal student loans could not be discharged in bankruptcy except under conditions of undue hardship. Private student loans were placed in the same category in 2005. This means that student loans are in the same category as child support, alimony, and criminal fines.
Only 1% of bankruptcy filings attempt to include student loans. Around 40% of those succeed. Most bankruptcy attorneys will not attempt to have student loans discharged unless they are very confident that their client meets the conditions.
Most successful attempts to discharge student loans fall into one of three categories:
- Severe and documented medical problems. Serious medical conditions that do not allow you to work and are unlikely to be resolved are a legitimate reason to include student loans in bankruptcy.
- Extreme economic circumstances. If you are experiencing extreme poverty with no realistic possibility of improvement you may be able to persuade a bankruptcy court to discharge student loans.
- Age. Individuals who are still burdened by student loans in their retirement years may get a favorable decision from a court.
Experienced bankruptcy attorneys state that serious and ongoing medical problems are the most successful basis for an attempt to include student loans in bankruptcy.
Private Student Loans Can Now Be Discharged In Bankruptcy But Consider The Alternatives First
In July 2021, a federal court ruled that private student loans can be discharged in bankruptcy. But student loan refinancing may offer a better way to manage your college debt without significantly damaging your credit score.
Bankruptcy is a legal proceeding that provides financial relief for consumers who cannot repay their debt. Many types of debts can be forgiven in bankruptcy, including credit card debt and medical debt. But certain types of educational benefits, such as federal student loans, cannot be discharged in bankruptcy.
In previous bankruptcy cases, it was unclear whether private student loans were dischargeable loans until July 2021, when a federal court ruled that private student loans are not considered qualified higher education expenses under the U.S. Bankruptcy Code.
Discharging private loans in bankruptcy may provide much-needed respite for debtors who can’t meet their debt obligations, but bankruptcy has a lasting impact on an individual’s finances and credit score. It’s important to consider the alternatives before resorting to bankruptcy.
If you’re having trouble making your private student loan payment, then refinancing may be the answer. By refinancing your college debt to a lower rate, it may be possible to reduce your monthly payment so you can avoid defaulting on your loans.
How To Pursue Student Loan Discharge In Bankruptcy Proceedings
Meeting the standard of undue hardship is incredibly difficult, so its worth speaking with a bankruptcy lawyer to see if its even a possibility in your unique situation. However, you may be able to claim it under certain circumstances, such as living with a permanent disability or terminal illness.
Even if you think you meet the standard of undue hardship, its important to understand that discharging student loans involves additional work on top of the standard bankruptcy proceeding.
Its not as simple as filing for bankruptcy, Kantrowitz says. Its an adversary proceeding within a bankruptcy proceeding. That means the lender gets to defend against bankruptcy discharge.
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Managing Student Loans: Discharging Private Loans In Bankruptcy
Kyra Baker is a fact-checker with nearly 10 years of experience working and assisting on editorial projects within the culture, arts, and publishing spaces. For the past eight years, she has worked as a fact-checker at Art Papers Magazine, an Atlanta, Georgia-based art magazine. Kyra has also fact-checked and edited for The Rosarium Publishing, the publishers of the science fiction anthology, “Mothership: Tales from Afrofuturism and Beyond.”
Student loans come in two broad varieties. Most people are familiar with public or government-issued and backed loans, but there is also a thriving market in private loans made by banks and other for-profit financial institutions.
Private loans are not subject to the same regulations or loan discharge and management programs that are available for government-backed loans. On the other hand, private loans are generally subject to federal and state regulations that apply to other non-educational loans and arein many waysno different than car loans, mortgages, and other types of personal lending.
According to a MeasureOne report published in June 2020, total student loan debt in the U.S. was $1.67 trillion, of which private student loan debt is estimated at $131.81 billion. More consumer debt is tied up in student loans than any other type, with the exception of mortgages .
Can I Discharge A Private Student Loan In Bankruptcy
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In a Nutshell
Private student loans are loans extended by private lenders that are not backed by the federal government. This article will cover the limited relief methods available for private student loans. The article will also discuss dischargeability challenges in a bankruptcy filing.
Written byAttorney John Coble.
Private student loans are loans extended by private lenders that are not backed by the federal government. These loans are only to be used for qualified educational expenses. Private student loans don’t have many of the relief provisions allowed for by federal student loans. There are rarely any income-based repayments, forbearances, and deferments made available when debtors repay these loans. This article will cover the limited relief methods available for private student loans. The article will also discuss dischargeability challenges in a bankruptcy filing.
What Schools Qualify As Eligible Education Institutions
If you owe private student loans for a school that was not accredited, your loans can probably be discharged in a Chapter 7 bankruptcy right away. Even some big-time lenders still make private student loans to such unprotected organizations. Its quite common to find vocational and trade school students with these types of unprotected loans. Flight schools for pilots seem to be notoriously unaccredited, yet pilots errantly labor under hundreds of thousands of dollars of unmanageable student loans believing there is no hope for them. You can see some real case studies showing how easily these loans were discharged.
In particular the issue that makes these private student loans so easily dischargeable in bankruptcy is the fact the school was not an eligible educational institution or that the loans were for a qualified higher education expense.
The characteristics of a private student loan get even more specific. An accredited school must also have offered Title IV federal loans or the private loans may not be protected from discharge in bankruptcy.
Can You Declare Bankruptcy If You Owe Money On Your Student Loans
It is not impossible, but it is difficult to discharge your student debts via bankruptcy.
When student loan payments become too much to bear, declaring bankruptcy to discharge your debts entirely may seem like the best choice. You would be free of that huge amount of debt if you filed for bankruptcy.
However, is a major financial decision usually made as a last resort. Bankruptcy is damaging to your credit since it remains on your record for seven to ten years. When it comes to paying off your college debts, its even more challenging.
The overwhelming majority of the time, weve had customers try to obtain a bankruptcy discharge on federal student loans, but theyre unsuccessful, says Travis Hornsby, creator of Student Loan Planner. Your prospects are low if your income is over the poverty level and you dont have a chronic impairment.
Commonalities Of Private And Federal Student Loans
Private loans and government-backed loans do have one important thing in common. In 2006, private loans were made non-dischargeable in bankruptcy with the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act . In other words, you can’t automatically eliminate them in a bankruptcy case like you can other debts, like credit cards and medical bills.
That doesn’t mean it’s impossible to get rid of them in bankruptcy. Private loans are subject to the same discharge standard that public or government-backed loans are. More particularly, they can only be discharged if they will cause undue hardship to the debtor or a debtors dependent.
Student loan debt forgiven or discharged between 2021 and 2025 is tax-free, due to the American Rescue Plan of 2021.
There is another way those private loans may be discharged. That path lies in a circuitous interpretation of several federal statutes that define which private loans can be considered educational loans for purposes of bankruptcy. As we’ll see, at the heart is whether you can deduct the interest on the loans from your income tax.
Process For Discharging Student Loans
Student loan bankruptcy is usually part of a Chapter 7 or Chapter 13 bankruptcy filing. The Chapter 7 bankruptcy is an attempt to have all unsecured debt discharged. The Chapter 13 bankruptcy is an attempt to have the debt reorganized in payments the borrower can afford.
Student loan bankruptcy laws are tilted heavily in favor of the lender. There are strict guidelines as to whether your student loans can be erased and they apply to any loan specifically granted for education expenses, including both private and public student loans. They apply to student borrowers as well as parents borrowing loans to pay for their childrens education.
If you want to pursue bankruptcy for you student loan debt, the first step would be to find a reputable bankruptcy attorney. One of the reasons so few student loan bankruptcy cases are successful is because more than 50% are filed by the borrower, who has no legal training or understanding of the court system. According to Austin, probably another 40% or more are pro bono cases, meaning the lawyer is donating his time for free.
Either way, the odds are stacked against the borrower right from the start.
To succeed, you must be able to prove that your student loans impose an undue hardship on you and your dependents. The term undue hardship has endless interpretations, but most of them have favored creditors.
Courts use three criteria for verifying undue hardship:
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What Is A Qualified Education Loan
Student loans are protected against bankruptcy by law unless eligibility is proven otherwise. However, many loans can be referred to as student loans without meeting the right requirements. According to bankruptcy attorney Craig Andresen, in order for a loan to be qualified as a student loan:
it must have been made under a government or nonprofit student loan program, or it must be a qualified educational loan under section 221 of the Internal Revenue Code, for attending an eligible education institution as defined in section 221 of the Internal Revenue Code, and incurred for costs of attendance as defined in section 472 of the Higher Education Act.
Andresen says, Perhaps you were not an eligible student at the time the private student loan was made to you or maybe the loan was not incurred to pay qualified education expenses or perhaps the loan was not for attendance at an eligible education institution because the school was not accredited under Title IV of the Higher Education Act. All these are requirements imposed by section 221 of the Internal Revenue Code. Failure of a private student loan to meet any of these criteria means that the loan is fully dischargeable, because it would not qualify under section 523 of the bankruptcy law.
Reasons For The Department Of Education To Oppose Fewer Undue Hardship Discharge Petitions
The U.S. Department of Education can choose to not oppose undue hardship petitions for the bankruptcy discharge of federal student loans. It should exercise this authority more often. Here are a few recommendations for when undue discharge petitions for student loan should be allowed without opposition.
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Private Student Loan Bankruptcy Is Getting Easier
The truth is that it is getting easier to discharge private student loans. But it’s not automatic like it is for other consumer debts. Many borrowers will still need to jump through extra hoops to get a discharge.
Finding a bankruptcy attorney or law firm that’s willing to file an adversary proceeding can be challenging. That’s where I come in. I’ve helped many people just like you successfully navigate filing bankruptcy on their private student loans. Schedule a free 10-minute talk so we can discuss how I can help you do the same.
Hey, Iâm Tate.
I’m a student loan lawyer that helps people like you with their federal and private student loans wherever they live.
Defaulting On Student Loans
How many parents have student loans?
The Department of Education said that 3.3 million borrowers had $74.5 billion in Parent Plus loans in 2016 to pay for their childrens education. Another study by the University of Southern California said the average parent borrows $21,000, but that parents with incomes higher than $120,000 borrow an average of $30,000.
The Consumer Financial Protection bureau said that 2.8 million people 60-and-over were paying on student loans in 2017. That is four times the number who borrowed in 2007. Even worse, the Government Accounting Office says that 37% of student loan borrowers age-65 and over are in default.
If youre considering bankruptcy, your loans are probably already in default, meaning you havent made a payment in more than 270 days . This is more common than you may think. The national default level on student loan repayment is approximately 10%, meaning that 4.4 million borrowers are in default on Americas $1.4 trillion student loan problem.
The Department of Education said that the default rate was falling in 2016, but that is misleading according to many experts because nearly 6.5 million borrowers were in deferment or forbearance, two forms of delay before a borrower goes into default. Austin said his research indicates that 40% of student loan borrowers are either delinquent or in default .
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How To Demonstrate Undue Hardship
“Bankruptcy discharge of student loans is very rare, but not completely impossible,” Kantrowitz adds.
According to Kantrowitz, these are some circumstances in which borrowers have been able to demonstrate “undue hardship:”
- The borrower is disabled, but the private student loan does not offer a disability discharge.
- The borrower has a disabled dependent, which affects the borrower’s ability to work full time while caring for the dependent, or where the cost of caring for the dependent yields a higher minimal standard of living.
- The borrower has very low income and limited prospects for increasing income.
- Alimony and child support obligations reduce the borrower’s net income, affecting the ability to maintain a minimal standard of living while repaying the student loan debt.
- The borrower has a high cost of living due to where they are living , which affects the minimal standard of living threshold.
- The college degree was worthless and does not enable the borrower to earn enough to repay the debt.
- The amount of debt is excessive compared with the borrower’s income, making it difficult to repay the debt. For example, a grandparent cosigned a private student loan for a grandchild and is now retired on fixed income.
Qualifying For Student Loan Bankruptcy Discharge
A discharge of your student loans may be possible if you prove you have an undue hardship that prevents you from making student loan payments, orwith private loansif the loans did not provide an educational benefit.
With federal student loans, there is no standard set of guidelines for demonstrating undue hardship. Most courts rely on the Brunner Test, which requires you to prove that:
- You wouldnt be able to maintain a basic living standard if you made loan payments.
- Your financial hardship will last an extended amount of time.
- You made a good faith effort to repay your loans before filing for bankruptcy.
Not only are these circumstances extremely challenging to prove, the Brunner Test is somewhat subjective. Not only every state, but every jurisdiction will have different standards in determining whether the Brunner Test applies, said Leslie Tayne, a financial attorney and the founder and managing director of Tayne Law Group, in an email to The Balance.
Its not the only test that exists, however. The courts of the Eighth Circuit, for example, use the totality of circumstances test, which looks at the borrowers overall situation. This benchmark is considered less restrictive than the Brunner Test.
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How To Discharge Student Loan Debts In Bankruptcy
Everything about student loans and bankruptcy revolves around two simple words: undue hardship. To discharge student loans during bankruptcy you must prove that the payments impose undue hardship on you.
To a debtor struggling to make payments, this may sound very straightforward. Fighting to make payments every month always seems like undue hardship. Bankruptcy courts, however, usually take a very restrictive view of what constitutes undue hardship.
If you wish to include student loans in bankruptcy you will have to add an additional step, called an adversary proceeding, to the usual bankruptcy process. This will almost always require the assistance of an attorney. That can be difficult because if you can afford an attorney you will almost certainly not meet the undue hardship standard.
Most bankruptcy courts look at three standards, known as the Brunner test, to establish undue hardship:
- Minimum standard of living. Paying your student debts will leave you unable to provide even a minimal standard of living for you and any dependents you may have.
- Certainty of persistence. Evidence has to indicate that there is no realistic possibility of financial recovery.
- Good faith effort. You will have to demonstrate that you have made a good faith effort to pay off the loans.
Courts may also use the totality of circumstances test, assessing your overall condition to determine whether an undue hardship exists.