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.
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