Over 11 percent of Americans with student loans have defaulted on their debt. For many, their loans are so out of control that they’re out of options. If you’re in this situation, you might face wage garnishment, calls from collection agencies, and ruined credit.
One of the few ways to eliminate your student loans is through bankruptcy, but it is notoriously difficult. It can be a lengthy legal process, and you’ll have to prove that you’re facing undue hardship to succeed.
If this is a path you’re considering, here’s how to prove undue hardship for student loans.
What is undue hardship?
To qualify for student loan discharge via bankruptcy, you’ll have to prove you face undue hardship. The interpretation of “undue hardship” can vary from person to person, so a bankruptcy court might evaluate your case with the Brunner Test. Not all courts use it, but preparing for the Brunner Test will ensure you’re ready for court.
In the Brunner Test, the courts look at several different 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 in good faith. That means they will determine if you have tried to repay your loans and failed, or if you’re intentionally creating hardship for yourself through poor decisions.
Getting the courts to agree to eliminate your student loan debt is rare. 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.
However, eliminating your loans is not impossible. If you’re over the age of 50, disabled, or facing significant financial difficulties, you might be more likely to qualify.
How to declare undue hardship
Filing for bankruptcy to get a lender to forgive your loans can be a complicated process. While you can file for bankruptcy on your own, you might want to consider hiring a lawyer specializing in bankruptcy. A trained law professional can help you navigate the process and prevent any misunderstandings in court.
To be eligible, 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. Completing this process 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 so important 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. That could mean 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. A detailed report of all of your expenses and payments can help your case.
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 like cancer, 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, one of the most essential things necessary for your case is documentation that you stayed in close conversation with your lender. That’s pivotal to demonstrate 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 communication. For phone conversations, keep a running list of every call, including the name of the representative you spoke to, date, and time.
Potential outcomes after proving undue hardship
If a court approves your request for undue hardship, there are three different possible outcomes:
- Your loans might be fully discharged, and you will no longer be responsible for the debt.
- Only a portion of your loans might be eliminated, and you’ll have to pay back the rest.
- You are responsible for the full amount, but they will lower your interest rate.
The court will provide you with information on how to proceed and what the new terms will be.
However, the court might not approve your request and could eliminate all of your debt except for your student loans in bankruptcy. In that case, you’re responsible for your 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.
Ironically, filing for bankruptcy is expensive. Research found that the average cost to file for Chapter 7 bankruptcy protection is over $1,500, reported CNN. Just submitting the paperwork can cost hundreds, and hiring a lawyer can add to the cost substantially.
Beyond the cost, there are substantial drawbacks to bankruptcy. One of the biggest is the impact it has 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 will be sky 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 or even affect your job search.
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.
If you’re in default and are so overwhelmed you’re considering bankruptcy, consider rehabilitating your loans first to potentially get a lower monthly payment and your loans into good standing.
Although knowing how to prove undue hardship for student loans is important, filing for bankruptcy is a major financial decision. Make sure you are prepared for it and have exhausted all other options.
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
|Lender||Variable APR||Eligible Degrees|
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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 7.89% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 6.97% 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
APR stands for “Annual Percentage Rate.” Rates listed include a 0.25% EFT discount, for automatic payments made from a checking or savings account. Interest rates as of 11/8/2018. Rates subject to change.
Variable rate options consist of a range from 3.27% per year to 6.09% per year for a 5-year term, 4.64% per year to 6.14% per year for a 7-year term, 4.69% per year to 6.19% per year for a 10-year term, 4.94% per year to 6.44% per year for a 15-year term, or 5.19% per year to 6.69% per year for a 20-year term, with no origination fees. APR is subject to increase after consummation. The variable interest rate will change on the first day of every month (“Change Date”) if the Current Index changes. The variable interest rates are based on a Current Index, which is the 1-month London Interbank Offered Rate (LIBOR) (currency in US dollars), as published on The Wall Street Journal’s website. The variable interest rates and Annual Percentage Rate (APR) will increase or decrease when the 1-month LIBOR index changes. The variable interest rates are calculated by adding a margin ranging from 0.98% to 3.80% for the 5-year term loan, 2.35% to 3.85% for the 7-year term loan, 2.40% to 3.90% for the 10-year term loan, 2.65% to 4.15% for the 15-year term loan, and 2.90% to 4.40% for the 20-year term loan, respectively, to the 1-month LIBOR index published on the 25th day of each month immediately preceding each “Change Date,” as defined above, rounded to two decimal places, with no origination fees. If the 25th day of the month is not a business day or is a US federal holiday, the reference date will be the most recent date preceding the 25th day of the month that is a business day. The monthly payment for a sample $10,000 loan at a range of 3.27% per year to 6.09% per year for a 5-year term would be from $180.89 to $193.75. The monthly payment for a sample $10,000 loan at a range of 4.64% per year to 6.14% per year for a 7-year term would be from $139.65 to $146.76. The monthly payment for a sample $10,000 loan at a range of 4.69% per year to 6.19% per year for a 10-year term would be from $104.56 to $111.98. The monthly payment for a sample $10,000 loan at a range of 4.94% per year to 6.44% per year for a 15-year term would be from $78.77 to $86.78. The monthly payment for a sample $10,000 loan at a range of 5.19% per year to 6.69% per year for a 20-year term would be from $67.05 to $75.68.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
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.
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 2.28% effective October 10, 2018.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.47% – 6.99%3||Undergrad & Graduate|
|2.57% – 6.97%1||Undergrad & Graduate|
|2.51% – 8.09%4||Undergrad & Graduate|
|3.02% – 6.44%2||Undergrad & Graduate|
|2.50% – 7.24%5||Undergrad & Graduate|
|2.79% – 8.39%6||Undergrad & Graduate|