It is a common misconception that you cannot file for bankruptcy for student loans. It is possible to pay off federal and private student loans in bankruptcy, but it is more difficult than paying off most other debts. Because of the potential costs and financial impact of bankruptcy, consider your debt relief options before making a decision.
Here’s how filing for bankruptcy for student loans works and how to determine if it’s the right choice for you.
How to file bankruptcy for a student loan
The discharge of student loans comes at the end of the bankruptcy process. Here’s what you need to do first.
1. Find a bankruptcy lawyer. While a lawyer isn’t absolutely necessary, working with a lawyer, especially with at least some experience with student loans, can help you navigate the complicated process more easily.
Bankruptcy filing costs from several hundred to several thousand dollars, depending on your location and the complexity of the case. In addition, there are legal fees for the adversarial proceedings required to cancel student loans.
However, you probably won’t be eligible for a student loan bankruptcy discharge if you can afford a lawyer, says Michael Fuller, a consumer lawyer based in Portland, Ore. Who handles bankruptcy cases. pro bono student loan.
Here’s where to find free legal help:
2. Chapter 7 or 13 bankruptcy case. You must declare bankruptcy before your student loans can be canceled. Your lawyer can help you determine the type of consumer bankruptcy it’s better for you: chapter 7 or chapter 13.
If you’ve already filed for bankruptcy but haven’t tried to have your student loans canceled, you can reopen the case and advocate for them to be canceled.
3. File a complaint to start the adversarial procedure. Wiping out student loans through bankruptcy requires additional prosecution known as adversarial proceedings. To begin with, you – or your bankruptcy lawyer, more likely – must file a written complaint describing your case. From there, the case will be argued until the judge determines the outcome. You may receive a full discharge, a partial discharge, or no discharge.
How to prove undue hardship for student loans
To pay off student loans through bankruptcy, you will need to prove that they constitute “undue hardship” during your adversarial proceedings.
The United States Bankruptcy Code does not define undue hardship, so bankruptcy courts have different interpretations of its meaning. Most use what is called the Brunner test to determine whether student loans from bankrupt filers meet the undue hardship standard.
You must prove that you complete all three parts of the Brunner test for your college debt to be paid:
1. Make student loan repayments would prevent you from maintaining a minimum standard of living based on your current income and expenses. To cope with it, you usually have to have rudimentary expenses and have done everything in your power to increase your income, without success.
2. Additional circumstances make it very likely that your financial situation will persist for a significant portion of the remaining term of your loan. Among other things, you may be able to achieve this if you have a severe mental or physical disability, received a poor quality education, or maximized your income potential in your field.
3. You have made “good faith” efforts to repay your loans. You can meet this component by making some loan repayments, trying to negotiate a payment plan, and working to cut unnecessary expenses and increase income.
Different jurisdictions and judges have different interpretations of these standards, so your outcome will depend on your location and which judge you get.
Should You File Bankruptcy For Your Student Loans?
While the discharge of a student loan in bankruptcy is possible, it is probably only worth exploring in the following cases:
You have exhausted all payment options. If you have federal student loans, see if you can afford income-based reimbursement or qualify for a loan forgiveness program. Private student loans offer fewer options for borrowers in difficulty. Nonetheless, call your lender or service agent and ask if they can temporarily lower your payment or interest rate.
You are behind on your student loans. If you do not have missed payments, you will probably have a hard time proving that they are causing undue hardship. Bankruptcy makes more sense in the event of student loan default – especially if you have defaulted on your private student loans and your lender is suing you in an attempt to enter your salary.
You have no default output path. Federal student loans have options for getting out of default, including loan rehabilitation and regrouping. If you’ve repeatedly defaulted on a loan, you may have exhausted those options.
These situations do not guarantee that a bankruptcy court will discharge your student loans, but they have 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% got full or partial discharge of their student loans.
If you decide to file for bankruptcy on your student loans, talk to a professional first. A student loan lawyer or bankruptcy lawyer with experience in student loans can help you determine if this is the best option for you.
If you need more help with your student loan
If you’re having trouble with your student loan debt, talk to your server or lender to:
Discuss repayment options.
Take a temporary payment break.
Temporarily reduce your monthly payments.
If your issue is with your lender or service agent, or if you’re not getting the help you need, look for a legitimate student loan assistance organization that offers advice. Consider these approved resources for student loan help; these are established organizations with verified track records:
Many of these organizations offer free advice. In some cases, you may need to pay a fee, such as with a certified nonprofit credit counseling agency or if you hire a lawyer.
None of the above organizations call, text, or email borrowers with debt resolution offers.
Offers of help that you haven’t researched are likely to be scams. While it’s not illegal for businesses to charge for services like consolidating or signing up for a payment plan, these are steps you can do on your own for free.
Avoid debt relief companies that require cash up front.