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Can You Include Student Loans In Bankruptcy

Havent There Been Cases Where People Still Got Rid Of Their Students Loans Through Bankruptcy

Student Loan Debt and Personal 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.

What Is Student Loan Bankruptcy

You may have heard that student loans cannot be discharged in bankruptcy. That statement oversimplifies the truth. You actually can get student loans discharged in some cases, but the bar is higher, and the process is more burdensome than it is for other types of debt.

Filing for bankruptcy to discharge student loans may get easier, though, if a recently introduced bipartisan bill is passed. The Fresh Start Through Bankruptcy Act of 2021, by Senators Dick Durbin and John Cornyn , would restore the ability for struggling borrowers with federal student loans to seek a bankruptcy discharge for their loans 10 years after the first loan payment comes due.

It would also make it possible to retain the existing undue hardship discharge option for private student loans and for federal student loans that have been due for fewer than 10 years.

Criteria Based On The Student

The student who is using the student loan:

  • Must be enrolled on at least a half-time basis.
  • Is seeking a degree, certificate or other recognized educational credential.
  • Cannot be a dual enrollment student. A dual enrollment student is a student who is simultaneously enrolled in an elementary or secondary school in addition to a college or university.

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Government Versus Private Loans

The federal government is the lender for a significant percentage of student loans. However, private financial institutions, such as banks, also offer loans to students, primarily because many students cannot fund their entire education without such supplementation. It doesn’t matter whether you have a government or a private student loan. To discharge either in bankruptcy, you must show that repaying the loan would cause undue hardship.

Bankruptcy Discharge Of Student Loans Is Very Rare

How bankruptcy affects your student loan

You cant simply wave a magic wand, announce to the world I declare bankruptcy and watch your student loans disappear. It isnt that easy.

In a 1981 bankruptcy court case, Judge Burton R. Lifland said that discharging student loans required a certainty of hopelessness, not simply a present inability to fulfill the financial commitment.

It is much easier to wipe away credit card debt, personal loans, auto loans and mortgages than student loans. The U.S. Bankruptcy Code puts student loans in the same category as child support obligations, taxes and criminal fines.

Statistics concerning the rarity of bankruptcy discharge for student loans are based on information provided by the Educational Credit Management Corporation . ECMC is the guarantee agency that services defaulted federal student loans when the borrower files for a bankruptcy discharge.

Only 29 of 72,000 student loan borrowers with active bankruptcy filings in 2008 succeeded in getting a full or partial discharge of their student loans, according to ECMC.

Thats 0.04%, or odds of about 1 in 2,500. Youre more likely to die of a heart attack or of cancer than to get your student loans discharged in bankruptcy. Still, the odds of discharging student loans in bankruptcy are better than your odds of winning the Powerball lottery jackpot.

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When To File Student Loan Bankruptcy

There’s no set time to file student loan bankruptcy. You can file it before your bankruptcy case closes. Bankruptcy law also allows you to file it after the court closes your bankruptcy case.

From my perspective as a student loan lawyer, I recommend people should consider filing student loan bankruptcy when:

  • they can no longer afford their private student loans and can’t afford a settlement
  • they have a physical disability that limits their ability to work but does not qualify them for a total and permanent disability discharge
  • they have defaulted a second time on a federal student loan and can’t get out of default
  • they cannot get a professional license
  • their elderly and have made a good faith effort to repay their student loans

If you decide you’re ready to file student loan bankruptcy after looking at your situation, the next step is to meet with a bankruptcy attorney to determine what bankruptcy you should file, Chapter 7 or Chapter 13.

Seven Year Rule Or Waiting Period

Section 178 of the Bankruptcy & Insolvency Act in Canada specifically excludes government guaranteed student loans if you have been a full or part-time student any time in the past seven years. To put it simply, if you have been out of school for more than seven years your student loan debt will be eliminated if:

If it has been less than seven years since you were a student, your government guaranteed student loan will not be automatically discharged through a bankruptcy or a consumer proposal.

If you have been out of school for 7 years your student loans are eliminated when you claim bankruptcy. You are no longer obligated to pay your student loans. If you have not been out of school for 7 years, you can stop making payments during your bankruptcy or proposal but will be required to start making payments again once you are discharged.

What if I have more debts than just my student loans? If you have other significant debts like credit card debts, lines of credit or payday loans, a bankruptcy or consumer may still be a good option even if you dont meet the waiting period. Filing bankruptcy can help clear other debts and make repaying your student loan more manageable. We know this can be confusing. Our Licensed Insolvency Trustees will discuss the treatment of your specific student loans during your free consultation before you file.

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The Totality Of Circumstances Test

A few states use the “totality of the circumstances” test. It might seem that this is an easier standard to meet because it doesn’t consider whether youve made a good-faith effort to repay your loans, such as consistent attempts to obtain employment, maximize income, and minimize expenses. However, the totality of the circumstances test also includes an any other relevant facts and circumstances component that could be broadly interpreted.

Under either standard, the bar to clear is high, especially for federal student loans, for which the government specifically states that the burden of proof is on the debtor to prove undue hardship.

Can The Court Discharge A Portion Of My Student Loan Debt

Can Student Loans Be Discharged in Bankruptcy – Any Chapter

Yes. The court is not forced to choose between all or nothing in a student loan discharge case. The court has the option to discharge a portion of your student loans if they choose to.

When looking to discharge student loans in bankruptcy, the possibility of a partial discharge can be good or bad, depending on your situation. Sometimes, a partial discharge allows us to drastically reduce your student loan payments which can change your life.

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Can You Discharge Student Loans In Bankruptcy

Yes! While not everyone is entitled to discharge student loans in bankruptcy, it is not impossible as many people would have you believe.

To determine whether you can discharge student loans in bankruptcy, you should start by identifying the type of loan that you have. Generally, you should know whether you have a federal student loan or a private student loan. While it is possible to discharge federal student loans in bankruptcy, it is more difficult to discharge federal student loans in bankruptcy than to discharge private student loans in bankruptcy.

Why? In order to discharge a federal student loan in bankruptcy, you must establish an undue hardship. This can be difficult to prove for many people. On the other hand, there are other ways to show that a private student loan can be discharged in bankruptcy . Well discuss this in more detail below.

The Additional Step: Filing An Adversary Proceeding

Here’s where things get more complicated. As stated earlier, just filing for bankruptcy under either Chapter 7 or Chapter 13 is not enough to have your student loans discharged. You must take the additional step of filing an adversary proceeding.

Under the U.S. bankruptcy code, an adversary proceeding is a proceeding to determine the dischargeability of a debt. In other words, it’s a lawsuit within a bankruptcy case. Included in the adversary proceeding paperwork is “a complaint.” The complaint includes administrative details, such as your bankruptcy case number, along with the reasons you are seeking to discharge your student loans in bankruptcythe circumstances of your undue hardship.

Thisadditional step is necessary because student loans and a few other types of debt have stricter requirements for discharge than credit card debt, for example. These requirements are described in section 523 of the U.S. bankruptcy code. The keywording that relates to the discharge of student loans is: A discharge under…this title does not discharge an individual debtor from any debt…unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtors dependents.” Note the words “undue hardship,” which is discussed below.

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Student Debt Less Than Seven Years Old

If your student loan is less than 7 years old, then you still have student loan forgiveness options that can help make repayment of your student debt easier. Negotiate new payment arrangements. Try contacting the student loans office to negotiate a new payment arrangement. Repayment assistance is available through the National Student Loan Service Centre and their Repayment Assistance Plan. You can:

  • Ask for a temporary reduction in payments including making interest only payments.
  • Ask for more time to repay your student debt. You can extend your payment period for up to 14.5 years.
  • Apply for a hardship reduction. The government will reduce your interest costs for the first 10 years and may reduce the principal owing after 10 years. However, you must prove financial hardship to qualify, including meeting an income threshold and approval is not guaranteed.

Be aware that the first two options will keep you in debt longer and will increase the total interest you pay on your student debt. The hardship option is the only option, other than bankruptcy or a consumer proposal, that will reduce the total student loan payments you make over time. If you are successful in negotiating new student debt repayment terms, do your best to maintain the payments to sustain your agreement. The area of bankruptcy and student debt can be complicated.; We answer more questions on our student debt help FAQ page.

Why Student Loans Are So Difficult To Discharge In Bankruptcy



Filing for bankruptcy has allowed millions of Americans to walk away from credit card debt, car loans, and even unpaid medical bills. But there are two kinds of debt that are difficult to discharge in bankruptcy court: mortgages and student loans.

Congress has made it difficult to discharge mortgage and student loan debt in bankruptcy in part because of the widely shared belief that there are societal benefits to promoting homeownership and access to higher education. Homeownership helps Americans build wealth, and educated workers command higher salaries and are better able to compete in the global economy.

Tough restrictions on bankruptcy discharge are one of the factors that keeps investment capital flowing into home loans and student loans, which helps keep them available and affordable for many people.

When millions of Americans found themselves in foreclosure during the height of the mortgage crisis, lawmakers dismissed calls from consumer advocates that bankruptcy judges be allowed to “cram down” mortgage debt.

The lending industry successfully argued that changing the rules after the fact would spook investors in mortgage-backed securities, which is the source of funding for the vast majority of home loans.

Role of private lenders

While the government now funds about 90 percent of student loans directly, private lenders also make loans to borrowers with good credit, often at lower rates than government loans.

Undue hardship

Congress can fix it

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How Bankruptcy Helps You Manage Student Debt

Federal and private student loans are usually not discharged in the bankruptcy process. Although filing for Chapter 13 can help you manage repayment in the following ways:

  • The automatic stay will give you time to catch up on payments. During the automatic stay, creditors cannot harass you.
  • Through bankruptcy, an affordable payment plan is set up to reorganize and address all of the debt owed. In this way, filing for Chapter 13 can decrease or delay the regular payments required for student loans.
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    If you defaulted on your student loan because you failed to make payments over a 270-day period, your state and federal tax refunds can be withheld to pay back your student loan. If you filed for bankruptcy prior to the offset, you may be able to get the money returned to you. Learn more >

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    New Bill Would Allow Student Loan Discharge In Bankruptcy After 10

    During the hearing, Senators Dick Durbin and John Cornyn briefly introduced a new bill that would overhaul student loan discharge in bankruptcy rules.

    The Fresh Start Through Bankruptcy Act would allow student loan borrowers to discharge federal student loans after a 10-year waiting period. Colleges with more than one-third of their students receiving federal student loans would be required to partially refund the government if the students loans are later discharged in bankruptcy.

    Durbin, who has introduced and co-sponsored student loan reform bills in the past, noted that this would be the first bipartisan effort to reform the bankruptcy rules.

    The rules of student loan discharge through bankruptcy have evolved over the last 20-plus years. Waiting periods for student loans to be discharged in bankruptcy previously ranged from five to seven years. But in 1998, Congress rewrote the Higher Education Act and eliminated the waiting period for student loan discharge eligibility; it would only be possible if a borrower proved undue hardship, something Durbin described during this weeks hearing as nearly impossible.

    We made a mistake in 1998, Durbin said. Undue hardships should not be the only path to address student loans in bankruptcy. We should go back to how it was before 1998 where borrowers could seek relief after a significant waiting period. That system worked.

    The Brunner Test Involves Three Prongs:

    Can I Declare Bankruptcy On Student Loan Debt?
    • 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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    Can I Get A Student Loan While In Chapter 13 Bankruptcy

    People tend to use the time while working through bankruptcy to set new goals for themselves. One way that some people plan to better themselves and build a more stable financial future is through earning a degree. But how can you afford college tuition when youre sticking to a bankruptcy repayment plan? Can you take out a student loan to make this possible?

    Your goals for a brighter financial future are important. Bankruptcy judges and trustees dont want to make your path towards improvement more difficult. Yet, getting loans while working through bankruptcy isnt a clear-cut process. Learn more about the possibility of student loans during bankruptcy, if filing for Chapter 13 will make it harder to borrow money in the future, and how student debt can be discharged through bankruptcy.

    What Is Chapter 13 Bankruptcy

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    A Chapter 13 bankruptcy does not liquidate your assets, but it does require you to repay all or a portion of your debts in installments specified by a court-approved bankruptcy plan.

    If you successfully complete your Chapter 13 bankruptcy plan, the court discharges most or all of your remaining unsecured debt. Remember, like a Chapter 7, your student loan is not automatically discharged under your Chapter 13 general bankruptcy discharge order. So, unless you file an adversary proceeding in which the bankruptcy court concludes you met the undue hardship standard, your student loan will remain a debt you must repay following bankruptcy.

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