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.
How Student Loan Bankruptcy Works
If youre considering student loan bankruptcy, falling behind on your payments will have had a major impact on your life. Perhaps your wages have been garnished because a lender took out a judgment against you. The federal government may have kept your tax refund and applied it to your federal student loans because they were delinquent or in default.
Your student debt is probably just one component of the financial challenges you are currently facing. In fact, if student debt is your only problem, you are unlikely to succeed in getting it discharged through bankruptcy. Filing for student loan bankruptcy is not easy and does not guarantee that you will walk away debt-free. But if your credit is shot, bankruptcy could be a faster path to financial health than continuing to struggle to pay your debts.
There is no special type of bankruptcy called “student loan bankruptcy.” Succeeding in having student loans discharged through bankruptcy involves filing Chapter 7 or Chapter 13 and then taking an additional step, which is filing an “adversary proceeding,” or AP. The AP must be filed to have your student loans considered for discharge.
Private Student Loans Bankruptcy: Is It Getting Easier
Many or all of the products featured here are from our partners who compensate us. This may influence which products we write about and where and how the product appears on a page. However, this does not influence our evaluations. Our opinions are our own. Here is a list ofour partnersandhere’s how we make money.
If you need solutions for your student debt:
Find help:;Options for legit student loan help resources and organizations to contact.
Pause payments: Find out the differences between student loan forbearance and deferment.
Get out of default:;Learn the consequences of and remedies for defaulting on your student debt.
Declare bankruptcy: Explore how to discharge student debt in bankruptcy.
Student loan borrowers who seek to have their debt canceled in bankruptcy ;what’s known as discharge typically find it an expensive process with standards that can be difficult to meet. But recent bankruptcy court rulings and lawmakers’ support of relief for overburdened borrowers may signal a change is coming for private student debt.
In July 2021, a New York-based federal appeals court refused to dismiss a lawsuit against Navient for violating a court order to discharge loans, and ruled that private student loans are not protected from discharge in bankruptcy.
These decisions could serve as a precedent for future bankruptcy cases involving student loans, says John Rao, an attorney with the National Consumer Law Center.
Are Student Loans Dischargeable In Bankruptcy
In bankruptcy, you can discharge many different types of debt. That includes unsecured debt like credit cards, personal loans, collection accounts, medical bills, business loans and, in some cases, even student loans.
By law, bankruptcy trustees are required to prioritize certain types of debts in regard to when they get paid. For example, things like child support and alimony, unpaid taxes and criminal fines must be paid before your unsecured debts, which are considered non-priority.
While priority debts generally cannot be discharged, you may be able to be released from accounts included in the non-priority category. Student loans are counted among non-priority debts, but you’ll still have a really hard time discharging them in Chapter 7 or Chapter 13 bankruptcy. The only exception is if you can prove that your student debt has caused undue hardship to yourself and your dependents.
Private Student Loans Can Be Tossed In Bankruptcy Appeals Court Rules
Signage is seen on the offices of Navient in Wilmington, Delaware, U.S., June 9, 2021. REUTERS/Andrew Kelly
- Ruling could open doors for more borrowers to discharge private student loan debt
- Navient says it supports bankruptcy law reform
The company and law firm names shown above are generated automatically based on the text of the article. We are improving this feature as we continue to test and develop in beta. We welcome feedback, which you can provide using the feedback tab on the right of the page.
– A New York-based federal appeals court on Thursday said that private student loans are not protected from discharge in bankruptcy.
In a 21-page decision, a three-judge panel of the 2nd U.S. Circuit Court of Appeals upheld U.S. Bankruptcy Judge Elizabeth Stongs refusal to dismiss a lawsuit against student loan servicer Navient Solutions LLC accusing it of violating a prior court order discharging a borrowers loans.
George Carpinello of Boies Schiller Flexner, who represented the borrower, said in an interview on Thursday that the decision is significant for people who might have wanted to seek bankruptcy relief to address their student loan debt but felt they couldnt because they assumed their private loans would not be dischargeable.
Whats really egregious about this is Navient has been telling people for years that their loans are non-dischargeable, when in fact they are dischargeable, he said.
For Navient: Thomas Farrell and Elizabeth Sieg of McGuireWoods
Don’t Miss: How To File Bankruptcy In Wisconsin
Changes To Bankruptcy Law
Over the years, different members of Congress have introduced legislation to make student loans dischargeable in bankruptcy like other types of debts. But, unfortunately, that legislation has gone nowhere.
And while America waits for Pres. Joe Biden to forgive student loan debt, another proposal to change the treatment of student loan debt in bankruptcy was introduced, this time by Sen. Elizabeth Warren. Sadly, like the legislation before it, the Consumer Bankruptcy Reform Act of 2020 has yet to go anywhere.
Filing For Bankruptcy On Your Student Loans Is Hard To Do
In order to file bankruptcy on student loans, borrowers have to meet a multi-part test proving that they have no chance of ever being able to pay the debt back. They have to demonstrate that paying their student loans would cause them “undue hardship.”
“Congress didn’t define what it meant by ‘undue hardship,’ so it was left to the courts to decide,” says higher education expert;. As such, courts use a common method called the Brunner Test to evaluate whether or not a borrower qualifies for student loan discharge through bankruptcy. Through the Brunner Test, a borrower must prove the following:
Also Check: What Is A Bankruptcy Petition Preparer
Should You File Student Loan Bankruptcy
While student loan bankruptcy discharge is possible, its likely only worth exploring in the following instances:
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.
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.
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.
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.
Take Steps Early To Avoid Credit Damage
If you’re not sure you can make your student loan payments, take steps early to avoid missing payments and default. Both of these scenarios can damage your credit score, making it difficult to qualify for refinancing or get approved for favorable credit terms in the future.
As you decide the best path forward for you, monitor your credit regularly to understand how your actions impact your credit score. Credit monitoring can also help you spot potential issues before they cause significant damage.
Read Also: Filing For Bankruptcy In Wisconsin
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.
Hey, Iâm Tate.
I’m a student loan lawyer that helps people like you with their federal and private student loans wherever they live.
Wiping Out Student Loan Debt In Bankruptcy
If you want to attempt to wipe out your loan in bankruptcy, then you need to file for an adversary proceeding to evaluate dischargeability with the bankruptcy court. However, things dont end here. You will have to present evidence and prove that if you submit payment for your loans, then it would cause an undue hardship. If the bankruptcy court grants your request for undue hardship, then the following outcomes are possible:
- Your student loans might be completely discharged and youll no longer be accountable for the debt.
- Only a part of your student loans might be removed, and you will need to pay back your remaining debt.
- You are accountable for the complete amount, but theyll lower the interest rate.
Contact our Maui bankruptcy attorney today to get help preparing for the adversary proceeding.
Blake Goodman provided professional and outstanding legal advice.
– Moune Romano
They worked with me every step of the way.
– Randi Brown
You and your staff consistently made extra efforts in assisting me with my bankruptcy case.
– Phetsamone Vuong
His hard work, diligence, meticulous attention to detail, and dedication to his practice reflect great credit upon himself, his practice, his staff, and the law profession in the State of Hawaii.
– Ben Pascua
Im very grateful to Mr. Goodman for the effort and patience he had with me and my daughter. I appreciate it. As for his staff members, they are very kind.
– Martha Aki
Also Check: Epiq Corporate Restructuring Llc
Chapter 13 And Student Loans
A case under chapter 13 is often called reorganization. In a chapter 13 case, you submit a plan to repay your creditors over time, usually from future income. These plans allow you to get caught up on mortgages or car loans and other secured debts. If you cannot discharge your student loans based on undue hardship in either a chapter 7 or chapter 13 bankruptcy, there are still certain advantages to filing a chapter 13 bankruptcy. One advantage is that your chapter 13 plan, not your loan holder will determine the size of your student loan payments. You will make these court-determined payments while you are in the Chapter 13 plan, usually for three to five years. You will still owe the remainder of your student loans when you come out of bankruptcy, but you can try at this point to discharge the remainder based on undue hardship. While you are repaying through the bankruptcy court, there will be no collection actions taken against you. You may have other options, depending on how judges decide these cases in your judicial district.; For example, some judges allow student loan borrowers to give priority to their student loans during the Chapter 13 plan.
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.
Recommended Reading: Can I File Bankruptcy Without My Spouse Knowing
What Bankruptcy Cannot Do
Unfortunately, bankruptcy is not a cure all for every type of debt. Here are some things that you cannot accomplish through filing a bankruptcy:
Stop a secured creditor from repossessing property: A bankruptcy cannot eliminate liens, so if you have secured debt, it will not prevent creditors from repossessing property.
Eliminate child support or alimony payments: These obligations will survive a bankruptcy and you will continue to owe them in full.
Eliminate student loans: In some very limited circumstances a bankruptcy may be able to wipe out student loans, but this is not the norm. To discharge student loans, you would have to show that repaying them would cause you undue hardship, which is not an easy standard to meet. You will also have to prove that, in addition to not being able to currently pay them off, the likelihood of being able to pay in the future is slim.
Eliminate most tax debts: Much like student loans, eliminating tax debts is not easy, though it is sometimes possible for older debts if you meet the requirements.
Eliminate other non-dischargeable debts: Under Chapter 7 and Chapter 13, these debts are not dischargeable:
Debts you did not list in bankruptcy papers, unless the creditor finds out about your bankruptcy case
Debts for personal injury or death caused by driving under the influence
Fines or penalties for violating the law
Why Student Loan Debt Is Treated Differently
Over the years, Congress has decided that good reasons exist to stop people from getting rid of their debts by declaring bankruptcy. For instance, Congress has made child support, alimony, certain tax debts, and criminal restitution non-dischargeable. The need to protect those types of debts from discharge is obvious. But after the federal government decided to start offering federal loans, Congress chose to do the same for student loan debt.
Student loans became non-dischargeable in the late 1970s when Congress added Section 523 to the U.S. Bankruptcy Code. The thinking was that the U.S. Department of Education should be protected from borrowers racing to bankruptcy after graduating. Over the years, Congress has amended Section 523 to protect different types of federal loans , and Federal Perkins Loans) and private loans.
Currently, Section 523 protects a student loan from discharge absent undue hardship if:
- it was made or insured by the federal government
- it was made under a loan program funded by the federal government or a nonprofit
- it is a qualified education loan according to the IRS’s criteria
All federal student loans are protected from student loan bankruptcy discharge. However, some private loans may not be. You can read more about discharging private loans here.
Recommended Reading: Bankruptcy Falls Off Credit Report
Decide Which Type Of Bankruptcy To File For
Next, on your own or with your lawyer, youll need to decide whether to file for Chapter 7 or Chapter 13 bankruptcy. Student loan bankruptcy can be addressed under either Chapter 7 or Chapter 13 bankruptcy, though its treated differently under the two categories.
Below is a breakdown of some of the qualifications and how each type of bankruptcy treats 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.
Note that personal bankruptcy can come at the cost of hurting your credit for years. When it comes to your credit report, a Chapter 7 bankruptcy remains there for 10 years, while a Chapter 13 bankruptcy stays for seven years, which can make it difficult for you to secure loans or credit, as well as favorable rates. When you file for bankruptcy, you can also rack up significant legal and court fees along the way.