Lana Oconnell
Student loans and bankruptcy is a complicated topic, and bankruptcy filers often don't understand how bankruptcy affects their student loan debt. It is difficult, but not impossible, to discharge student loan debt in bankruptcy. To get student loans discharged, you need to file an adversary complaint and complete an attestation form that outlines your income, expenses, and payment history. The type of bankruptcy case you file (Chapter 7 or Chapter 13) will also determine the judge's decision. In a Chapter 7 bankruptcy, the judge cancels all of your debt, but you must have an income below a certain amount to qualify. In a Chapter 13 bankruptcy, the judge helps you reorganize and lower your debt.
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What You'll Learn
Types of bankruptcy: Chapter 7 or Chapter 13
While it is difficult to discharge student loan debt in bankruptcy, it is not impossible. In order to discharge student loans in bankruptcy, one must show that they have an undue hardship. The factors considered when deciding whether or not one has an undue hardship include present and future ability to pay, as well as good faith effort to repay.
Now, onto the types of bankruptcy. Chapter 7 bankruptcy is often used by individuals, partnerships, or corporations who are unable to repair their financial situation and want to cancel all of their debt. It involves liquidating the debtor's non-exempt assets and distributing the proceeds to creditors. To qualify for Chapter 7, one must have an income below a certain amount.
On the other hand, Chapter 13 bankruptcy is for individuals with reliable income who don't qualify for Chapter 7. It allows individuals to keep their assets, such as their homes and vehicles, while reorganizing and repaying their debts through a court-approved repayment plan over 3 to 5 years. There is no income requirement for Chapter 13, but it is generally a longer and more complicated process than Chapter 7.
While Chapter 7 may be more suitable for those with limited assets and simple cases, Chapter 13 can offer more flexibility and control over the repayment process, especially for those with secured debts. It's important to discuss both options with a bankruptcy attorney to determine the best course of action.
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Adversary proceeding
Bankruptcy is a complex process that can be challenging to navigate, especially when dealing with student loan debt. While it is possible to discharge student loan debt in bankruptcy, it is generally considered a last resort due to the potential impact on credit scores and the time and costs involved. However, for individuals struggling with debt, bankruptcy may be a viable option to explore.
When it comes to student loans and bankruptcy, an important concept to understand is the adversary proceeding (AP). An AP is a legal process utilized in bankruptcy court to address specific issues or disputes that arise during a bankruptcy case. It is a formal lawsuit filed within the bankruptcy case. In the context of student loans, an AP is necessary if an individual seeks to discharge their student loan debt.
Through the AP, the bankruptcy judge will evaluate whether the individual meets the criteria for undue hardship, which is a critical factor in determining whether student loans can be discharged. The judge will consider the present and future ability to pay, including factors such as income, expenses, retirement, disability, long-term unemployment, and good faith efforts to repay the loans before filing for bankruptcy. During the AP, the individual will be required to fill out an attestation form, providing detailed information about their financial situation.
The Department of Justice (DOJ) represents the federal government, the creditor for federal student loans, in the adversary proceeding. The DOJ will also assess whether the individual is experiencing undue hardship. If the DOJ agrees that undue hardship is present, it will recommend a full or partial discharge of the student loans to the judge. However, even if the DOJ does not recommend a discharge, the judge has the authority to make the final decision and may still find that undue hardship exists and approve the discharge.
It is important to note that the process for discharging student loans in bankruptcy differs depending on the type of loan. Federal student loans, such as federal Direct Loans or federal Direct Consolidation Loans, have specific guidelines, while private student loans may fall under different categories and require a more comprehensive legal process. Consulting with a bankruptcy attorney can be beneficial to understand the specific steps and options available for discharging student loans through bankruptcy.
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Undue hardship requirement
To discharge student loan debt in bankruptcy, you must demonstrate that repaying your loans would cause you "undue hardship". The court will decide whether you meet this standard, but the Department of Justice (DOJ) will first ask you to fill out an attestation of undue hardship. The factors considered when deciding whether you have an undue hardship include:
- Present Ability to Pay: If you are forced to repay your student loans, will you be able to maintain a minimal standard of living? If your expenses equal or exceed your income, the DOJ will determine that you lack the present ability to pay.
- Future Ability to Pay: Can you show that your hardship will continue for a significant amount of the time left for repaying your loans? The DOJ will assume you do not have the ability to pay in the future if you are in retirement, have a disability, have a chronic injury, have a long history of unemployment, do not have a degree, or have been in extended repayment status.
- Good Faith Effort to Repay: Have you made good faith efforts to repay your student loans before filing for bankruptcy? Have you contacted the Department of Education or your loan servicer to discuss payment options for your loan before filing for bankruptcy?
Even if the DOJ does not recommend discharging your loans, the judge may still find that you have an undue hardship and discharge your loans. For example, a 50-year-old student loan borrower earning $8.50 per hour as a telemarketer was granted a discharge because they did not earn enough to pay off their loans and meet their basic needs. Similarly, a borrower who received Social Security benefits due to a medical condition received a discharge because they were able to show the judge that their illness was likely to prevent them from working in the future.
If your bankruptcy case has already been approved but you did not ask the court to determine undue hardship, you can request that your bankruptcy case be reopened and then ask for an adversary proceeding to discharge your student loans.
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Good faith effort to repay
To discharge student loan debt in bankruptcy, you must prove that it presents an "undue hardship". One element of this is demonstrating a good-faith effort to repay the loan. This means that you cannot have abused the system or shown a lack of interest in repaying your loans.
The Department of Education has provided the following guidelines and examples for federal loans:
- Making a payment—the more payments you have made, the better
- Applying for a deferment or forbearance (other than in-school or grace period deferments)
- Applying for an Income-Driven Repayment (IDR) plan
- Meaningfully engaging with the Department of Education or their loan servicer regarding payment options, forbearance and deferment options, or loan consolidation
It is important to note that these guidelines do not change the bankruptcy code but advise U.S. attorneys on what they should accept for settlement purposes. If they still fight you, these guidelines cannot be used to compel a judge to rule in your favour.
Additionally, the courts generally look at the following factors:
- Whether the debtor has made minimal or no payments
- Whether the student loan was a significant portion of the overall debt in the bankruptcy
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Discharging private student loans
It is difficult, but not impossible, to discharge student loan debt in bankruptcy. Both federal and private student loans can be discharged in bankruptcy. However, it is important to note that bankruptcy is often considered a last resort due to its potential negative impact on your credit score and the costs and time involved in the filing process.
To discharge private student loans in bankruptcy, you typically need to demonstrate ""undue hardship"". The court decides whether you meet this criterion, and there is no definitive rule about what constitutes "undue hardship". However, some factors the court may consider include your present and future ability to pay and your good-faith efforts to repay the loans before filing for bankruptcy.
Some private student loans may not require you to demonstrate "undue hardship". Certain types of education loans, such as those with amounts higher than the cost of attendance (tuition, books, room, and board), can be discharged in a standard bankruptcy proceeding like other unsecured consumer debts. Loans taken out to pay for education at unaccredited schools, foreign schools, or unaccredited training programs may also fall into this category.
To determine whether your private student loans qualify for discharge without demonstrating "undue hardship", you can refer to the Consumer Financial Protection Bureau's list of elements that define a non-qualified private student loan. If your loan is considered non-qualified, it will be treated like credit card debt in bankruptcy. However, creditors may argue that the loan is qualified, which would require you to go through an adversary hearing.
If you are considering bankruptcy to discharge your private student loans, it is advisable to consult an experienced bankruptcy attorney to understand your specific situation and explore alternative options for managing your debt.
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Frequently asked questions
Yes, but it is difficult. You will need to show that you have an undue hardship and that you have made a good faith effort to pay your loans in the past.
Courts assume undue hardship when you can demonstrate that you don't currently have the financial ability to make the monthly payments on your federal loans while maintaining a minimal standard of living.
A good faith effort to pay your loans could include contacting the Department of Education or your loan servicer regarding payment options for your loan prior to filing for bankruptcy.
There are two types of bankruptcy that are relevant to student loans: Chapter 7 and Chapter 13. In a Chapter 7 bankruptcy, you ask a judge to cancel all of your debt, but you have to have an income below a certain amount to qualify. In a Chapter 13 bankruptcy, the judge helps you reorganize and lower your debt. There is no income requirement, but you have to make payments on your debts in a plan the bankruptcy court sets for 3 to 5 years before the court will cancel the rest of your debts.
Bankruptcy is often considered a last resort option because of the impacts it can have on your credit and the costs and time involved in filing. If you are struggling with debt and student loans, it may be worth talking to an experienced bankruptcy attorney about your options.
