How to Prove Undue Hardship for Student Loans

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Discharging student loans through bankruptcy is difficult. You’ll have to prove that repaying them would cause you “undue hardship,” a test that can require you to meet a high bar.

While filing for bankruptcy can be a lengthy legal process that has a damaging impact on your credit, if your student loans are unmanageable, attempting to eliminate them through bankruptcy may be worth taking into account. Defaulting on student loans can lead to wage garnishment, calls from collection agencies and ruined credit, which discharging your loans could free you from.

If bankruptcy is a path you’re considering, here’s what you need to know about proving undue hardship for student loans:

What is undue hardship?

To qualify for student loan discharge through bankruptcy, you’ll have to prove you’d face undue hardship in repaying them. The definition of “undue hardship” can vary by person, so a bankruptcy court might evaluate your case using the Brunner Test. Not all courts use it, but preparing for the Brunner Test will ensure you’re ready if it’s used in court.

The Brunner Test evaluates several factors to determine undue hardship, including:

  • Would you be able to maintain a minimal standard of living if you had to repay the loan?
  • Are the financial difficulties you face temporary, or are they expected to continue for several years?
  • Have you made efforts to keep up with your payments before filing for bankruptcy?

The court will also consider whether you’re seeking a discharge for your student loan hardship in good faith. That means it will determine if you have tried to repay your loans and failed, or if you’re intentionally creating hardship for yourself through poor financial decision-making.

It’s rare for courts to agree to eliminate your student loan debt. In most cases, the court will direct you to repay your loans with the help of other federal programs, such as an income-driven repayment plan or deferment.

But eliminating your loans is not impossible. If you’re over the age of 50, have a disability or facing significant financial difficulties, you might be more likely to qualify.

Some lawmakers are trying to make the process of proving undue hardship a little easier. As noted in a recent report, some members of Congress are seeking to uncomplicate the process of discharging student loans when filing for bankruptcy.

The proposed bill, which is backed mainly by Democrats, would allow those with student loans to file for bankruptcy to completely wipe out their current student loan debt. A press release from Massachusetts Sen. Elizabeth Warren’s office explained that this bill “would eliminate the section of the bankruptcy code that makes private and federal student loans nondischargeable” in efforts to make sure it’s “treated like nearly all other forms of consumer debt.”

How to declare undue hardship

Filing for bankruptcy can be a complicated process. You may want to hire a lawyer specializing in bankruptcy law. To be eligible for student loan discharge, you must file for either Chapter 7 or Chapter 13 bankruptcy. Most states require you to complete a credit counseling course and obtain a certificate before you can file.

You can only qualify for student loan discharge if you file a separate action known as an adversary proceeding, which submits your request to the bankruptcy court and shows that repaying your loans would cause you and your family to endure undue hardship.

However, just submitting the action does not guarantee that the court will rule in your favor. Your creditors, including your loan servicers, can challenge your claim. That’s why it’s critical to be well prepared ahead of your hearing.

How to prove undue hardship for student loans

The burden of proof is on you as a debtor to prove undue hardship. To succeed in convincing the court to discharge your loans, you will need to provide meticulous records.

Collect documentation to show that you would be unable to maintain a minimal standard of living, like a spreadsheet showing all of your current expenses, such as rent, groceries, medication and utilities, with copies of your credit card statements or receipts to support each line item.

Also list all of your debt and monthly payments, with screenshots of your balance and monthly statements. If there are extenuating circumstances, such as a medical emergency, that caused you to be unable to keep up with your payments, collect documentation on that, too. For example: If you or a dependent had a serious illness, you might have had extensive medical bills or treatments that forced you to leave your job.

In that case, collect a letter from your doctors, a letter from your employer with your resignation or termination date and copies of your medical bills. If your condition is not expected to improve, a statement from a medical professional saying you’ll be unable to work in the future can be helpful.

Finally, it’s essential to have documentation that shows you stayed in close conversation with your lender because it demonstrates you made a good-faith effort to repay your loans, a key factor the court considers.

Bring copies of your monthly loan statements and screenshots or records of any payments you made. If you communicated with your loan servicer via email, print a copy of every message. For phone conversations, keep a running list of every call, including the name of the representative you spoke with and the date and time you called.

Potential outcomes after proving undue hardship

If you were successful in proving undue hardship, there are three possible outcomes:

  1. Your loans might be fully discharged, and you will no longer be responsible for the debt.
  2. Only a portion of your loans might be eliminated, and you’ll have to pay back the rest.
  3. You are responsible for the full amount but at a lower interest rate.

The court will provide you with information on how to proceed and what the new terms will be.

Another option is that the court eliminates all your debt except for student loans in bankruptcy. In that case, you’re responsible for the entire loan balance. If that happens, you can contact your loan servicer to discuss an alternative payment plan or temporary forbearance to help you get back on your feet.

Downsides of bankruptcy

While you might be able to get your loans discharged if you can prove undue hardship, filing for bankruptcy is a major decision with long-lasting consequences.

First, filing for bankruptcy is expensive. The average cost to file for Chapter 7 bankruptcy is $335, and hiring a lawyer can substantially add to the cost. Beyond the cost, there are substantial drawbacks to bankruptcy. One of the biggest is its impact on your credit score. Bankruptcy remains on your credit report for seven to 10 years; depending on the type of bankruptcy you file for, you could lose your property or assets.

If you need a line of credit after having your debt discharged, you might have trouble finding a company to approve you. Or, if you do find a lender, your interest rates could be high. Your poor credit can impact you in other ways, too. It can hurt your chances of a landlord approving you to lease an apartment, for instance.

What to do instead of declaring undue hardship

Although eliminating your loans through bankruptcy is possible as long as you can prove undue hardship, you should only consider it if your finances are in desperate need of a reset. Other student loan hardship forgiveness options are out there for consideration, too.

If you’re in default and are so overwhelmed you’re considering bankruptcy, consider rehabilitating your federal student loans first to potentially get a lower monthly payment and to put your loans into good standing. You may also be eligible for an economic hardship deferment (if your monthly income is low), which can allow you to postpone payments for a set time.

Knowing how to prove undue hardship for student loans is important, but filing for bankruptcy is a significant financial decision. Make sure you are prepared for it and have exhausted all other options before moving forward.

Carissa Chesanek contributed to this report.

Published in Credit & Debt, Student Loan Repayment, Student Loans