Here’s What Really Happens to Student Loans When You File Bankruptcy

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Can student loans be included in bankruptcy? Possibly.

Bankruptcy does not automatically discharge student loans, but there are instances where you could get your student loan debt wiped clean.

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 and student loans
Chapter 7 bankruptcy and student loans
Alternatives to bankruptcy
Before you file bankruptcy

Chapter 13 bankruptcy and student loans

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 and student loans

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.

Alternatives to bankruptcy

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.

Before you file bankruptcy

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 Gordon contributed to this report.

Interested in refinancing student loans?

Here are the top 8 lenders of 2019!
LenderVariable APREligible Degrees 
Check out the testimonials and our in-depth reviews!
1 Important Disclosures for Earnest.

Earnest Disclosures

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 3.45% APR (with Auto Pay) to 6.99% APR (with Auto Pay). Variable rate loan rates range from 1.99% APR (with Auto Pay) to 6.89% 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 November 21, 2019, 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 11/21/2019. 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 hello@earnest.com, or call 888-601-2801 for more information on our student 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 SoFi.

SoFi Disclosures

  1. Student loan Refinance: Fixed rates from 3.46% APR (with AutoPay) to 7.61% APR (without AutoPay). Variable rates currently from 2.31% APR (with AutoPay) to 7.61% (without AutoPay). Interest rates on variable rate loans are capped at either 8.95% or 9.95% depending on term of loan. See APR examples and terms. Lowest variable rate of 2.31% APR assumes current 1 month LIBOR rate of 2.31% plus 0.75% margin minus 0.25% for AutoPay. If approved for a loan, the fixed or variable interest rate offered will depend on your credit history and the term of the loan and will be within the ranges of rates listed above. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.

3 Important Disclosures for Figure.

Figure Disclosures

Figure’s Student Refinance Loan is a private loan. If you refinance federal loans, you forfeit certain flexible repayment options associated with those loans. If you expect to incur financial hardship that would impact your ability to repay, you should consider federal consolidation alternatives.


4 Important Disclosures for Laurel Road.

Laurel Road Disclosures

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. Mortgage lending is not offered in Puerto Rico. All loans are provided by KeyBank National Association.
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.

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.

FEE INFORMATION

There are no origination fees or prepayment penalties associated with the loan. Lender may assess a late fee if any part of a payment is not received within 15 days of the payment due date. Any late fee assessed shall not exceed 5% of the late payment or $28, whichever is less. A borrower may be charged $20 for any payment (including a check or an electronic payment) that is returned unpaid due to non-sufficient funds (NSF) or a closed account.

LOAN AMOUNT

For bachelor’s degrees and higher, up to 100% of outstanding private and federal student loans (minimum $5,000) are eligible for refinancing. If you are refinancing greater than $300,000 in student loan debt, Lender may refinance the loans into 2 or more new loans.
For eligible Associates degrees in the healthcare field (see Eligibility & Eligible Loans section below), Lender will refinance up to $50,000 in loans for non-ParentPlus refinance loans. Note, parents who are refinancing loans taken out on behalf of a child who has obtained an associates degrees in an eligible healthcare field are not subject to the $50,000 loan maximum, refer to https://www.laurelroad.com/refinance-student-loans/refinance-parent-plus-loans/ for more information about refinancing ParentPlus loans.

ELIGIBILITY & ELIGIBLE LOANS

Borrower, and Co-signer if applicable, must be a U.S. Citizen or Permanent Resident with a valid I-551 card (which must show a minimum of 10 years between “Resident Since” date and “Card Expires” date or has no expiration date); state that they are of at least borrowing age in the state of residence at the time of application; and meet Lender underwriting criteria (including, for example, employment, debt-to-income, disposable income, and credit history requirements).

Graduates may refinance any unsubsidized or subsidized Federal or private student loan that was used exclusively for qualified higher education expenses (as defined in 26 USC Section 221) at an accredited U.S. undergraduate or graduate school. Any federal loans refinanced with Lender are private loans and do not have the same repayment options that federal loan program offers such as Income Based Repayment or Income Contingent Repayment.

All loans must be in grace or repayment status and cannot be in default. Borrower must have graduated or be enrolled in good standing in the final term preceding graduation from an accredited Title IV U.S. school and must be employed, or have an eligible offer of employment. Parents looking to refinance loans taken out on behalf of a child should refer to https://www.laurelroad.com/refinance-student-loans/refinance-parent-plus-loans/ for applicable terms and conditions.

For Associates Degrees: Only associates degrees earned in one of the following are eligible for refinancing: Cardiovascular Technologist (CVT); Dental Hygiene; Diagnostic Medical Sonography; EMT/Paramedics; Nuclear Technician; Nursing; Occupational Therapy Assistant; Pharmacy Technician; Physical Therapy Assistant; Radiation Therapy; Radiologic/MRI Technologist; Respiratory Therapy; or Surgical Technologist. To refinance an Associates degree, a borrower must also either be currently enrolled and in the final term of an associate degree program at a Title IV eligible school with an offer of employment in the same field in which they will receive an eligible associate degree OR have graduated from a school that is Title IV eligible with an eligible associate and have been employed, for a minimum of 12 months, in the same field of study of the associate degree earned.

INTEREST RATES

The interest rate you are offered will depend on your credit profile, income, and total debt payments as well as your choice of fixed or variable and choice of term. For applicants who are currently medical or dental residents, your rate offer may also vary depending on whether you have secured employment for after residency.

DISBURSEMENT OPTIONS

The repayment of any refinanced student loan will commence (1) immediately after disbursement by us, or (2) after any grace or in-school deferment period, existing prior to refinancing and/or consolidation with us, has expired.

POSTPONING OR REDUCING PAYMENTS

After loan disbursement, if a borrower documents a qualifying economic hardship, we may agree in our discretion to allow for full or partial forbearance of payments for one or more 3-month time periods (not to exceed 12 months in the aggregate during the term of your loan), provided that we receive acceptable documentation (including updating documentation) of the nature and expected duration of the borrower’s economic hardship.

We may agree under certain circumstances to allow a borrower to make $100/month payments for a period of time immediately after loan disbursement if the borrower is employed full-time as an intern, resident, or similar postgraduate trainee at the time of loan disbursement. These payments may not be enough to cover all of the interest that accrues on the loan. Unpaid accrued interest will be added to your loan and monthly payments of principal and interest will begin when the post-graduate training program ends.

We may agree under certain circumstances to allow postponement (deferral) of monthly payments of principal and interest for a period of time immediately following loan disbursement (not to exceed 6 months after the borrower’s graduation with an eligible degree), if the borrower is an eligible student in the borrower’s final term at the time of loan disbursement or graduated less than 6 months before loan disbursement, and has accepted an offer of (or has already begun) full-time employment.

If Lender agrees (in its sole discretion) to postpone or reduce any monthly payment(s) for a period of time, interest on the loan will continue to accrue for each day principal is owed. Although the borrower might not be required to make payments during such a period, the borrower may continue to make payments during such a period. Making payments, or paying some of the interest, will reduce the total amount that will be required to be paid over the life of the loan. Interest not paid during any period when Lender has agreed to postpone or reduce any monthly payment will be added to the principal balance through capitalization (compounding) at the end of such a period, one month before the borrower is required to resume making regular monthly payments.

KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.

This information is current as of November 8, 2019 and is subject to change.


5 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.


6 Important Disclosures for CommonBond.

CommonBond Disclosures

Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). 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 1.9299999999999997% effective October 10, 2019.


7 Important Disclosures for LendKey.

LendKey Disclosures

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.

Subject to floor rate and may require the automatic payments be made from a checking or savings account with the lender. The rate reduction will be removed and the rate will be increased by 0.25% upon any cancellation or failed collection attempt of the automatic payment and will be suspended during any period of deferment or forbearance. As a result, during the forbearance or suspension period, and/or if the automatic payment is canceled, any increase will take the form of higher payments. The lowest advertised variable APR is only available for loan terms of  5 years and is reserved for applicants with FICO scores of at least 810.

As of 11/07/2019 student loan refinancing rates range from 1.90% to 8.65% Variable APR with AutoPay and 3.49% to 7.75% Fixed APR with AutoPay.

 


8 Important Disclosures for College Ave.

College Ave Disclosures

College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.

1College Ave Refi Education loans are not currently available to residents of Maine.

2All rates shown include autopay discount. The 0.25% auto-pay interest rate reduction applies as long as a valid bank account is designated for required monthly payments. Variable rates may increase after consummation.

3$5,000 is the minimum requirement to refinance. The maximum loan amount is $300,000 for those with medical, dental, pharmacy or veterinary doctorate degrees, and $150,000 for all other undergraduate or graduate degrees.

4This informational repayment example uses typical loan terms for a refi borrower with a Full Principal & Interest Repayment and a 10-year repayment term, has a $40,000 loan and a 5.5% Annual Percentage Rate (“APR”): 120 monthly payments of $434.11 while in the repayment period, for a total amount of payments of $52,092.61. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.

Information advertised valid as of 12/1/2019. Variable interest rates may increase after consummation.

1.99% – 6.89%1Undergrad
& Graduate

Visit Earnest

2.31% – 7.36%2Undergrad
& Graduate

Visit SoFi

2.21% – 6.21%3Undergrad
& Graduate

Visit Figure

1.99% – 6.65%4Undergrad
& Graduate

Visit Laurel Road

2.43% – 7.60%5Undergrad
& Graduate

Visit Splash

2.02% – 6.30%6Undergrad
& Graduate

Visit CommonBond

1.90% – 8.65%7Undergrad
& Graduate

Visit Lendkey

2.37% – 5.87%8Undergrad
& Graduate

Visit College Ave

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print to help you understand what you are buying. Be sure to consult with a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time.

Published in Student Loan Repayment

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