Under federal law, you have the right to declare bankruptcy relief from your creditors. However, this comes at the cost of hurting your credit for several years. You’ll also likely rack up significant legal and court fees along the way.
That said, if you’re defaulting on debt, then your credit score has already taken a hit. So at this point, bankruptcy may, in fact, provide you with a fresh start.
But can you file bankruptcy on student loans? The process certainly isn’t easy — and it doesn’t always work. Here’s what you need to know before going down this path.
Can student loans be discharged in bankruptcy?
Bankruptcy is rarely an easy process, but it’s notoriously difficult with student loan debt. In fact, the only way to discharge federal student loans through bankruptcy is to prove “undue hardship.”
Essentially, you have to prove that you can’t pay back your federal student loans. However, courts are left with some room to interpret your eligibility. Most courts evaluate hardship using The Brunner Test.
The factors of this test are outlined by the U.S. Department of Education’s Federal Student Aid office and are paraphrased below:
- You wouldn’t be able to maintain a basic standard of living if you had to pay back your federal student loans
- You can prove that the hardship will last for a large percentage of your repayment period
- You honestly tried to repay your federal student loans before this point
Although these points may seem easy to prove if you’re in dire straights, Leslie H. Tayne Esq. of Tayne Law Group, P.C. explains why that’s not the case:
“The reality is that unless you can show an extreme hardship where you will never work again and have attempted to pay back the loans and cannot, the likelihood is that bankruptcy won’t be an option. As a result, the general advice given is that student loans are not dischargeable in bankruptcy.”
If you do manage to prove undue hardship and successfully declare bankruptcy on your student loans, they’ll be partially discharged, fully discharged, or restructured. If restructured, you’ll receive new repayment terms that should be easier for you to handle.
Note: If you attended a for-profit school, you might be able to raise a defense related to the school’s practices. If you can prove there was a breach of contract or deceptive practices, you could have a chance of convincing a judge to discharge your student loans.
How student loan bankruptcy discharge works
1. Find a lawyer
While you don’t technically have to go through a lawyer to file bankruptcy, student loan bankruptcy can be an incredibly complex process. Going through it all alone could mean extra time, incorrect filings, and a lost case.
If you don’t know a lawyer, don’t worry. You can find one through the American Bar Association. Just make sure you pick a lawyer that specializes in bankruptcy and has very good reviews.
If, for whatever reason, you don’t feel comfortable working with a particular lawyer, find another one. Remember, you don’t have stick with the first lawyer you talk to.
Also, depending on your situation, you might be eligible for a lawyer at no cost to you through the Legal Services Corporation. It’s an independent nonprofit created by Congress offering financial support for civil legal aid to low-income Americans.
2. Follow the steps as the lawyer outlines them
Next, your lawyer will help you decide whether to file for Chapter 7 or Chapter 13 bankruptcy. Below is a breakdown of both:
Chapter 7 bankruptcy
- You must prove you have little disposable income available to pay off your debt
- Most unsecured debt can get wiped out
- Student loan debt may be eligible for discharge
- The process can take three to five months
Chapter 13 bankruptcy
- You have some income to use to repay some of your debt
- Your debt will be restructured, and some of it will need to be repaid
- Student loan debt may be eligible — but your repayment will be restructured, not discharged
- The repayment plan could last from three to five years
Another thing you and your lawyer will have to do is file a petition called an adversary proceeding to get a determination of undue hardship. This is part of the process that is unique to bankruptcy and student loans. Note that you can’t proceed with a student loan bankruptcy without this step.
Once all the proper paperwork is filed, your attorney will tell you what happens next. The steps could vary depending on your specific situation and the type of bankruptcy you proceed with.
Consider student loan repayment and forgiveness options first
Can you file bankruptcy on student loans? Maybe. Should you? That depends on you.
Bankruptcy is a complicated, intrusive, and extensive process. In fact, Tayne advises not doing it at all if you can help it:
“Though it’s difficult if not impossible to discharge student loans through bankruptcy, it would be wise to steer clear of considering bankruptcy in the first place. Bankruptcy is considered a more drastic option for debt resolution and often can be easily avoided with simple solutions that may not be obvious when strapped with a lot of student loan debt.”
You also have the option to apply for forgiveness, either through an income-driven repayment plan or Public Service Loan Forgiveness (PSLF). PSLF is available to those who work for certain public service organizations, such as government agencies or non-profits.
And if you have private student loans, talk to your lender. They might have a hardship program that you didn’t know about. Remember, you lose nothing at all by asking.
Before declaring bankruptcy and trying to fight against a system that’s designed not to discharge your student loan debt, be sure to research your other debt repayment options for student debt relief.
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