Can student loans be included in bankruptcy? Possibly.
The simplest way to understand bankruptcy and student loans is to examine the two types of bankruptcy you may be able to file for, as well as some alternative routes:
Chapter 13 bankruptcy is a reorganization where you’re required to repay part of your debt, likely over three to five years. Some of your remaining debts may be discharged at the end, including student loans. Here’s what happens to student loans under Chapter 13 bankruptcy:
Lenders stop hounding you. Upon filing your Chapter 13 bankruptcy petition, an automatic stay is granted. This prohibits most creditors — including student loan servicers — from trying to collect debts. This protection typically continues through your repayment period.
Student loans don’t take top priority. Student loans in Chapter 13 bankruptcy are considered nonpriority unsecured debt. This means you aren’t required to pay the full amount of your student loans through the Chapter 13 repayment plan.
Your monthly payment may change. The amount you end up paying toward your student loans in Chapter 13 bankruptcy depends on your 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 (more on this below).
Making full monthly payments may not be possible. If you want to continue paying your student loans in full outside Chapter 13 bankruptcy, you need to check. Some jurisdictions deny this because the full payments reduce what certain unsecured creditors would be paid during bankruptcy.
Student loan interest can mount. Your student loans may continue to accrue interest over the 3- to 5-year term of your Chapter 13 repayment plan, since you’re most likely not making full payments.
Student loans can come back to haunt you. Once the repayment plan is over, you may be responsible for the remainder of your student loans because they may fall into the non-dischargeable debts category. This category can also include child support, unpaid taxes, debts for damages caused by you or debt from restitution orders. As you can see, not all debt disappears after a bankruptcy, so you should get advice from a professional before you file.
Chapter 7 bankruptcy usually results in a liquidation of your assets. To file for Chapter 7, your current monthly income must be below the state median. If it’s not, you need to pass a means test to determine whether you have disposable income to pay the debt under a Chapter 13 plan. Unlike Chapter 13, Chapter 7 has no repayment plan. Some debts are fully discharged, while others are not. Here’s what happens to student loans when you file Chapter 7:
Lenders stop hounding you for money. Upon filing your Chapter 7 bankruptcy petition, an automatic stay is granted like it is with a Chapter 13 filing.
There’s no automatic student loan debt discharge. Under Chapter 7 bankruptcy, your student loans are not automatically discharged. 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.
You (and an attorney) attempt to prove your case for financial hardship. 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 that is still cited often, 40% of those who initiated the adversary proceeding were able to discharge all or part of their student loans.
However, only 0.1% 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 try.
The 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, it may not oppose. However, if the loan holder doesn’t believe you’ve proven undue hardship, it may oppose, but not before running the numbers on just how much such an opposition will cost.
The court may use one of two tests to determine undue hardship. There’s the Brunner test and the Totality of the Circumstances test. The criteria for each test is outlined in the Education Department 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 good-faith effort to pay back your student loans
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.
Ultimately, it boils down to proving you’re experiencing undue hardship. Undue hardship is living under circumstances that make it next to impossible to fulfill your financial duties. Maybe you’re living below the poverty line, you have a disability that makes you unable to work or you qualify for food stamps. These quality-of-living factors could help you prove you’re unable to repay your student loan debt.
The court makes a decision. If the court finds that you have, indeed, proven undue hardship, you may have all or part of your student loans discharged. If the court finds that you have not proven undue hardship, your student loans will not be discharged and you’ll be responsible for paying them back in full.
Before filing for bankruptcy, find out if you’re eligible for these alternatives:
- Income-driven repayment (IDR): IDR plans may be available for those with federal student loans. These plans base your monthly payment on your discretionary income, so if you’re experiencing a period of unemployment or underemployment, your payments can be adjusted to make them manageable. After 20 to 25 years of making payments under an IDR plan, your loans may be forgiven.
- Deferment or forbearance: Both deferment and forbearance put a pause on your federal student loan payments if you decide to go back to school or you’re having trouble making ends meet. While in deferment, you may not have to pay for the interest that accrues (depending on the type of loan), though while in forbearance, you’re required to pay interest on the loan. Private student loan companies may offer deferment or forbearance options as well.
- Discharge: In certain situations, your federal loans may be completely discharged. A total and permanent disability or the closing of your school could qualify you for a federal loan discharge.
Rather than filing for bankruptcy, getting an income-driven repayment plan or requesting a temporary stop to payments could help you get back on your feet.
Bankruptcy should be treated as a last resort under any circumstance. If you’ve asked “can student loans be included in bankruptcy,” make sure you’ve exhausted every other possibility before pursuing this.
The information we’ve provided on bankruptcy and student loans is not intended to replace legal advice. For recommendations specific to you, consult with a bankruptcy attorney.
Taylor Medine contributed to this report.
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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 2.98% APR (with Auto Pay) to 5.79% APR (with Auto Pay). Variable rate loan rates range from 1.99% APR (with Auto Pay) to 5.64% 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 July 31, 2020, 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 7/31/2020. 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 [email protected], or call 888-601-2801 for more information on our student loan refinance product.
© 2020 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
All credit products are subject to credit approval.
Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.
As used throughout these Terms & Conditions, the term “Lender” refers to KeyBank National Association and its affiliates, agents, guaranty insurers, investors, assigns, and successors in interest.
Assumptions: Repayment examples above assume a loan amount of $10,000 with repayment beginning immediately following disbursement. Repayment examples do not include the 0.25% AutoPay Discount.
Annual Percentage Rate (“APR”): This term represents the actual cost of financing to the borrower over the life of the loan expressed as a yearly rate.
Interest Rate: A simple annual rate that is applied to an unpaid balance.
Variable Rates: The current index for variable rate loans is derived from the one-month London Interbank Offered Rate (“LIBOR”) and changes in the LIBOR index may cause your monthly payment to increase. Borrowers who take out a term of 5, 7, or 10 years will have a maximum interest rate of 9%, those who take out a 15 or 20-year variable loan will have a maximum interest rate of 10%.
KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.
This information is current as of September 9, 2020. Information and rates are subject to change without notice.
3 Important Disclosures for SoFi.
4 Important Disclosures for Splash Financial.
Splash Financial Disclosures
Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. If approved, your actual rate will be within a range of rates and will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Refinancing or consolidating private and federal student loans may not be the right decision for everyone. Federal loans carry special benefits not available for loans made through Splash Financial, for example, public service loan forgiveness and economic hardship programs, fee waivers and rebates on the principal, which may not be accessible to you after you refinance. The rates displayed may include a 0.25% autopay discount.
The information you provide to us is an inquiry to determine whether we or our lenders can make a loan offer that meets your needs. If we or any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. We do not guarantee that you will receive any loan offers or that your loan application will be approved. Offers are subject to credit approval and are available only to U.S. citizens or permanent residents who meet applicable underwriting requirements. Not all borrowers will receive the lowest rates, which are available to the most qualified borrowers. Participating lenders, rates and terms are subject to change at any time without notice.
To check the rates and terms you qualify for, Splash Financial conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of September 10, 2020.
5 Important Disclosures for CommonBond.
Offered terms are subject to change and state law restriction. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900), NMLS Consumer Access. If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 0.16% effective August 10, 2020.