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It is possible to include student loan debt in your bankruptcy filing and get it approved by the court if you can prove undue hardship. That process can be difficult, however. If you're struggling financially and are thinking about filing bankruptcy, here's how to know if your student loans are eligible.
Can You File Bankruptcy for Student Loans?
It's possible to get student loans discharged in bankruptcy, but it can be difficult. 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 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.
Fortunately, the U.S. Department of Justice and the U.S. Department of Education recently outlined new guidance for attorneys handling bankruptcy cases with student loans. The new guidelines aim to make the process fairer and more transparent and also give borrowers a better idea of whether they meet the criteria for discharge.
How to Get Student Loans Discharged in Bankruptcy
Bankruptcy can be a difficult process with serious, negative long-term consequences. But if you've exhausted all of your other relief options, it may be the only remaining option. Here are some steps you can take to get started.
1. Work With a Lawyer
While you can technically file for bankruptcy on your own, it's a good idea to enlist the help of an attorney who can guide you through the process, help you maximize the effectiveness of the proceeding and protect your consumer rights.
As you consult with attorneys, talk about your student loan debt and how they can help you gauge the possibility of getting it discharged.
2. Decide if You Will File Chapter 7 or Chapter 13 Bankruptcy
While both Chapter 7 and Chapter 13 bankruptcy can help you get relief, the two are very different in how they get you there.
- Chapter 7: Also known as liquidation bankruptcy, Chapter 7 involves selling some of your assets to pay off as much eligible debt as you can with whatever is leftover getting discharged. You'll need to pass a means test to qualify for Chapter 7 bankruptcy, and while it can give you a clean slate with your debt, the record of your bankruptcy will remain on your credit reports for 10 years.
- Chapter 13: Referred to sometimes as a personal reorganization bankruptcy, Chapter 13 allows you to reorganize your debts in a way so you can make affordable monthly payments over a period of three to five years, based on your financial situation. Any eligible debt that isn't paid off will be discharged. While it will take longer to complete this type of bankruptcy, it'll have less of an impact on your credit history, remaining on your credit reports for seven years.
Take your time to consider your situation and your options, and speak with your chosen attorney to get advice on which path you should take.
3. File an Adversary Proceeding
An adversary proceeding is a separate lawsuit within a bankruptcy case, specifically for your student loan debt. In it, you'll request that the court find that keeping the debt would cause undue hardship for you and your dependents.
How to Prove Undue Hardship for Student Loans
As part of your adversary proceeding, you'll explain how your student loans are causing undue hardship. The criteria for demonstrating undue hardship can vary from court to court, however, and meeting the standard in any court can be difficult.
There are two tests courts generally use to determine whether you're experiencing undue hardship from your student loans. Depending on the court, there may be other tests that are used to determine whether you qualify to include student loans in your bankruptcy discharge, but these are the most common.
With the Brunner Test, you can discharge your student loans in bankruptcy if all three of these factors are present:
- Poverty: If you're required to continue making your loan payments, you'll be unable to maintain a minimal standard of living for yourself and your dependents based on your income and expenses.
- Persistence: Your current financial situation likely won't change for a significant portion of your student loan repayment period.
- Good faith: You've made a good faith effort to repay your student debt.
Totality of the Circumstances Test
With this test, the court will review all of the relevant factors of your situation to determine whether an undue hardship exists. It's up to the court to decide based on the information you provide.
Alternatives to Bankruptcy for Student Loans
If you find that your situation doesn't qualify you for student loan discharge, take some time to consider other ways to get relief or to pay off your debt with more affordable terms.
Income-Driven Repayment Plans
If you have federal loans, you may be able to qualify for up to four different income-driven repayment plans. These plans reduce your monthly payment to a percentage of your discretionary income and also extend your repayment term to up to 25 years.
Those changes to your loan terms may help you get a handle on your student loan payments without filing for bankruptcy. Also, if you still have a balance when the repayment term ends, the remainder will be forgiven.
Deferment or Forbearance
If you're experiencing temporary financial difficulties, you may be able to qualify for deferment or forbearance of your student loan payments. These options are available with federal student loans and even many private student loans.
Deferment and forbearance allow you to pause your monthly payments for a certain period, which can vary based on the lender and your situation. Just keep in mind that interest typically still accrues on your loans, and you'll need to make up those payments later. But if you need relief now, it can be worth it.
Student Loan Forgiveness or Repayment Assistance
Depending on your career path, you may be able to qualify for student loan repayment assistance or even forgiveness. Look into the Public Service Loan Forgiveness (PSLF) and Teacher Loan Forgiveness programs, as well as repayment assistance programs that may be available based on your job.
If you work for a private company, check with your employer to see if it offers (or has plans to offer) student loan repayment assistance as an employee benefit. If not, consider searching for a new job with an employer that offers that perk.
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 defaulting on your debt. Both of these scenarios can damage your credit score, making it difficult to 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.