Many people are unaware that you can discharge your student loans by filing for bankruptcy. However, this is one of the most difficult debts to get relieved of. If you are going to try this, then you must prove that paying your student loans will create an undue hardship in order to get them discharged. If you think that you qualify, then you might be wondering: can you file bankruptcy on student loans?
Getting your student loans discharged is a separate filing from bankruptcy. To do this you must file an adversary proceeding to determine if your loans can be discharged. This is a challenging process, so you’ll want to consider talking to a bankruptcy lawyer to help you navigate the filings. The difficulty and impact that bankruptcy can have should remind you to consider all of your options before filing. So the answer is yes, but there are some things you should consider first.
Factors to Consider Before Filing
Before you file for bankruptcy, there are a few things you should consider. The first is that filing for bankruptcy will affect your credit score significantly. Depending if you file for chapter 7 or chapter 13, bankruptcy will stay on your credit report for seven to 10 years. You should also be aware that when you file for bankruptcy, all of your financial information becomes available to the public. The court may also decide on how and when you can spend your money, as well as who you must repay first.
Something else that you can try instead of filing for bankruptcy is checking if you are eligible for an income-driven repayment plan. This allows you to repay your student loan debt at an affordable monthly rate based on your income. Another option is to see if you are eligible for a forbearance. A forbearance puts a temporary hold on your loan payments if you are approved. To get approved you must show that you have some kind of outstanding medical expense or financial obligation. You can also get approved for military or AmeriCorps service. One thing to consider with a forbearance is that your loans still build interest when you don’t pay them.
Next, you can check to see if you meet the requirements for Public Student Loan Forgiveness (PSLF). To qualify you must have made at least 120 qualifying monthly loan payments under a qualified plan while working full-time for a qualified employer.
Some last things to consider before you decide to file are the costs and time it takes to get your loans discharged. Getting student loans discharged is very uncommon, so you will want to be certain you will qualify before you try. If you plan on filing, you should be ready for filing fees and attorney fees — attorney fees average over $1,400 and filing fees are typically around $300. This can be a lot, especially for someone who is looking to file for bankruptcy. That is why it is important to fully understand where you stand with your finances. Many people do not realize what it costs to file for bankruptcy. For some people this is a burden that damages their finances even more. This is why you must be certain that you can do things like pay your rent and buy groceries after filing. If this is too much, then you might want to consider other options.
How to Demonstrate Undue Hardship
Proving that your student loans will cause you undue hardship is not an easy task. You will have to demonstrate that paying back your student loans will cause a significant negative effect on you and those who depend on you.
There is no set way to determine or ask someone to demonstrate undue hardship. Courts have the discretion of what methods they use to determine your hardships. A common method used by many courts to prove undue hardship is the Brunner test. To prove undue hardship, you must meet all three factors of the test:
- Poverty – You can’t afford to pay your loans with your present earnings and spendings, and maintain a minimal standard of living afterwards.
- Persistence – Your present financial struggles will carry on for a considerable amount of time while you repay your loans.
- Good Faith – You have made efforts in good faith to repay your loans and arranged for an affordable payment plan
Some courts use a different method of testing for undue hardship known as the Totality of Circumstances Test. For this test the court will review all of your applicable financial assets, future earnings, and expenses. Based on what they find they might rule for undue hardship. This test is different from others because it looks at all aspects that could have an effect on the person, rather than just one or two factors.
Filing for Student Loan Bankruptcy
Discharging your loans comes at the end of bankruptcy, and you might run into some tough questions along the way. There are a few things you can do to help you understand and complete the process.
1. Talk to a Financial Advisor or Lawyer
As mentioned, getting your loans discharged can be very challenging, especially for someone who is unfamiliar with the process. This is why you will want to seek assistance from a bankruptcy lawyer who is practiced and has been in these situations before. Their professional knowledge will be very useful when it comes to filling out the correct forms and procedures.
2. File for the Correct Type of Bankruptcy
When you try to discharge your student loans, you will first have to file for bankruptcy for either chapter 7 or chapter 13. Chapter 7 might discharge your loans if they deem you unable to pay because of undue hardship. Chapter 13 bankruptcy will not get rid of your loans, rather restructure the payments so they are affordable.
- You must show the court that you cannot afford the cost of your loans.
- If you are eligible, all loans can be cleared and you will no longer be personally liable.
- You must meet with and be questioned by your appointed trustee and creditors.
- This process can take 4 to 6 months, but can completely discharge your loans.
- You can prove that you can repay some of your debts, but finishing your current payments will cause undue hardship.
- Rather than being discharged, loans are restructured. You will hold onto assets and debts will be discharged after the case.
- You must create a payment plan for the court and all creditors to view.
- Payment plans can take 3 to 5 years.
3. Start the Adversary Process
An adversary proceeding is a lawsuit filed in bankruptcy and basically means that you are making a complaint in court. This is required for bankruptcy because your complaint is your inability to pay your student loans. When you file this proceeding you will need to have proof that you cannot make your loan payments due to undue hardships. This means verifying your income and proving that dependents rely on you, making it impossible to pay your loans.
So can you file for bankruptcy on student loans? The answer is yes, but you should look into other options first and establish an affordable payment plan. Now that you know what it takes to discharge your student loans this way, and you understand the difficulty and costs that come with proving undue hardship, you can take your next steps. Use a debt-to-income ratio tool to help you plan your payments by determining your ability to afford and pay a loan.