A Guide to Bankruptcy and Student Loans
Is your student debt becoming overwhelming? If you have asked yourself: ‘Can I file bankruptcy on student loans?’ The answer is yes, but only a tiny percentage of applicants are successful and filing bankruptcy on student loans can be a long and arduous process.
Can You File Bankruptcy on Student Loans?
Discharging federal and private debt via bankruptcy on student loans is achievable, but successful cases are rare unless you can prove a necessary legal standard of ‘undue hardship.’ To convince a judge of such circumstances, many people hire specialist student loan bankruptcy lawyers.
What Qualifies as Undue Hardship?
Bankruptcy courts have the choice between two tests to determine if a borrower is experiencing undue hardship:
The Brunner test
Under which the debtor must prove:
- Based on their current expenses and income they cannot maintain a minimal standard of living for themselves and any dependents if they are forced to repay their student loans.
- They have previously made reasonable faith efforts to repay the loans.
The Totality of Circumstances test:
The court will consider the past, present, and potential future financial circumstances of the debtor before making a decision.
Before you can petition a judge to ask if you can you file bankruptcy on student loans, you’ll need to file for Chapter 7 or Chapter 13 bankruptcy.
Chapter 7 Bankruptcy vs. Chapter 13
Chapter 7 Bankruptcy
If you choose Chapter 7 bankruptcy for student loans, the trustee will sell all of your non-exempt assets. State rules vary on exempt assets. However, these tend to include your home, your vehicle (as long as it’s sensible), and your personal possessions. The proceeds gathered from the sale of non-exempt assets are paid to creditors, and the court discharges the rest of your debt.
You can only file Chapter 7 if you have not had another Chapter 7 bankruptcy discharged in the previous eight years. Additionally, your income must fall below the state median household income.
Chapter 13 Bankruptcy
If you fail a Chapter 7 means test or run the risk of losing your home to foreclosure, Chapter 13 bankruptcy is an alternative option. Chapter 13 is also known as a reorganization.
If your application for Chapter 13 is successful, a student loan bankruptcy attorney can help you create a repayment plan using 100% of your income to repay student debts over a 3-5 year period. These repayments are supervised by a trustee, who will collect payments from you and pay your creditors as outlined in your repayment plan.
In this situation, your monthly payments will be determined by the court based on individual circumstances.
‘Can you file bankruptcy on student loans?’ Yes, but it is a complicated process. Now, let’s look at some alternative options:
Income-driven repayment plan
You can apply for income-driven repayment (IDR) plans to lower your monthly payments while paying off a federal student loan. Under these plans, your loan servicer can cap your payments at a percentage of your income and extend repayment terms up to 25 years.
Deferment or forbearance
If you’re experiencing job loss or any other temporary financial hardship, you may be able to postpone payments using a deferment or forbearance. This applies to all federal loans.
Loan discharge due to disability
If you are registered disabled, it is possible to have your student loans discharged without filing for bankruptcy.
With some federal loans, Total and Permanent Disability Discharge is available for totally and permanently disabled people. If you’re eligible, the loan servicer can write off the total remaining balance of your loans.
What to Know Before Filing
Now that we’ve looked at bankruptcy options and alternatives, there are some key points to consider before determining whether bankruptcy is the right option to take:
- Your chances are better if you are looking to settle a private student loan. This is because federal student loans offer income-driven repayment plans, whereas private student loans do not.
- If your student loan is your only debt, you’re less likely to be successful with filing bankruptcy. The more debt you have, the more circumstances appear to be beyond your control.
- You’ll have to pay court filing fees if you decide to pursue bankruptcy. These fees can be costly but may be waived in certain circumstances.
If you have private student loan and other unsecured debts, CreditAssociates might be able to help. Our Debt Consultants will review your circumstances and help to determine your best course of action to reduce debt – contact us today to get started on your free debt assessment.