Get ready to reconsider everything you think you know about bankruptcy and student loans.
Whether you’re hoping it will wipe them out, or you know better than to entertain such a pipe dream, the truth is this: Bankruptcy does not automatically discharge student loans, but it’s also not as far-fetched of a possibility as you may have been led to believe.
The simplest way to understand bankruptcy and student loans is to examine the two types of bankruptcy you may file.
Chapter 13 bankruptcy and student loans
Chapter 13 bankruptcy is a reorganization in which no debts are automatically discharged. Instead, you enter into a repayment plan to pay back a portion of your debts (of which your student loans may be included).
1. Upon filing your Chapter 13 bankruptcy petition, an automatic stay is granted. This prohibits most creditors – including student loan servicers – from trying to collect on your debts. This protection continues throughout the duration of the case, as well as your repayment period (if granted).
2. Under Chapter 13 bankruptcy, your student loans are considered “nonpriority unsecured debt.” This means you are not required to pay the full amount of your student loans through the Chapter 13 repayment plan.
3. The amount you end up paying toward your student loans in Chapter 13 bankruptcy can vary. It depends on your overall repayment plan; your student loans receive a pro rata share, which will likely represent a dollar amount less than your regular monthly student loan payment. In some cases, your student loan debt might be discharged.
4. If you want to continue making full monthly payments on your student loans during Chapter 13 bankruptcy, you might not be allowed to do so. While some jurisdictions allow it, others do not, as it reduces what you have to pay toward other high-priority debts.
5. Your student loans continue to accrue interest throughout the Chapter 13 repayment plan, which may be three to five years.
6. Once the repayment plan is over, you are responsible for the remainder of your student loans.
Chapter 7 bankruptcy and student loans
Chapter 7 bankruptcy results in a liquidation of your assets. Unlike Chapter 13, there is no repayment plan. Some debts are fully discharged, others are not.
1. Upon filing your Chapter 11 bankruptcy petition, an automatic stay is granted, which prohibits most creditors – including student loan servicers – from trying to collect on your debts.
2. Under Chapter 7 bankruptcy, your student loans are not automatically discharged.
3. To have your student loans considered for discharge, you can file a Complaint to Determine Dischargeability, which initiates what’s known as an adversary proceeding.
4. It may not be as hard to discharge student loans as you have been led to believe. In the case of extreme financial hardship that results in having very little to contribute toward the repayment of your debts overall, the court may decide to discharge your student loans completely.
The process is quite difficult and rarely happens, but it is possible. According to a study published in 2011, 40 percent of those who initiated the adversary proceeding were able to discharge all or part of their student loans.
However, only 0.1 percent of those who file Chapter 7 petitions filed the Complaint to Determine Dischargeability. In other words, people are so convinced it’s a near-impossibility that they don’t even bother trying.
“You see more and more judges siding with debtors for humane reasons,” Richard Fossey, a professor at the University of Louisiana who studies bankruptcy cases, told Yes Magazine. “It’s [judges] who are setting a trend with their decisions.”
5. However, your student loan holder may oppose your undue hardship claim. A July 2015 letter from the U.S. Department of Education advises loan holders on how this determination is made:
“First, a holder must evaluate a borrower’s undue hardship claim and determine whether the holder believes that repayment would constitute an undue hardship according to the legal standards set by the federal courts.”
If the loan holder believes you’ve proven undue hardship, they may not oppose.
If the loan holder does not believe you have proven undue hardship, they may oppose, but not before running the numbers on just how much such an opposition will cost. If it’s more than a third of what you owe, the loan holder may not oppose.
6. The court uses one of two tests to determine undue hardship, the criteria for which are outlined in the Department of Education letter referenced above.
Under the Brunner test, you must show that:
- Paying back your student loans will make it impossible for you to maintain a “minimal” standard of living
- Your financial situation is not likely to change anytime soon
- You’ve made a “good faith effort” to pay back your student loans up to this point
Under the Totality of the Circumstances test, the court considers:
- Your past, present, and likely future financial resources
- Reasonably necessary living expenses
- Other relevant facts and circumstances
While these are the two most common tests, some courts use others. A bankruptcy attorney should be able to tell you which test is used in your jurisdiction.
7. If the court finds that you have, indeed, proven undue hardship, you may have all or a portion of your student loans discharged.
8. If the court finds that you have not proven undue hardship, your student loans will not be discharged and you will be responsible for paying them back in full.
Before you file bankruptcy
Bankruptcy should be treated as a last resort under any circumstance. So, before filing bankruptcy on student loans, make sure you have exhausted every other possibility. This is especially important if you have federal student loans, as you have numerous income-driven repayment plan options, such as REPAYE and IBR.
Also, keep in mind that the information provided here on bankruptcy and student loans is not intended to replace legal advice. For recommendations specific to you, consult with a bankruptcy attorney.
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
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1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 6.97% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 6.23% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 08/21/18. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at firstname.lastname@example.org, or call 888-601-2801 for more information on ourstudent loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
Savings example: average savings calculated based on single loans refinanced from 9/2013 to 12/2017 where borrowers’ previous rates were disclosed. Assumes same loan terms for previous and refinanced loans, and payments made to maturity with no prepayments. Actual savings for individual loans vary based on loan balance, interest rates, and other factors.
Application detail: 5 minutes indicates typical time it takes to complete application with applicant information readily available. It does not include time taken to provide underwriting decision or funding of the loan.
Instant rates mean a delivery of personalized rates for those individuals who provide sufficient information to return a rate. For instant rates a soft credit pull will be conducted, which will not affect your credit score. To proceed with an application, a hard credit pull will be required, which may affect your credit score.
Total savings calculated by aggregating individual average savings across total borrower population from 9/2013 to 12/2017. Individual average savings calculation based on single loans refinanced from 9/2013 to 12/2017 where borrowers’ previous rates were provided. Assumes same loan terms for previous and refinanced loans, and payments made to maturity with no prepayments. Actual savings for individual loans vary based on loan balance, interest rates, and other factors.
3 Important Disclosures for SoFi.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.47% – 6.99%3||Undergrad & Graduate||Visit SoFi|
|2.47% – 6.23%1||Undergrad & Graduate||Visit Earnest|
|2.47% – 8.03%4||Undergrad & Graduate||Visit Lendkey|
|2.95% – 6.37%2||Undergrad & Graduate||Visit Laurel Road|
|2.48% – 6.25%5||Undergrad & Graduate||Visit CommonBond|
|2.72% – 8.32%6||Undergrad & Graduate||Visit Citizens|