Janice Lozano
Student loan borrowers often rely on their loan servicers to provide accurate information about their loans, including the legal protections available when they face repayment difficulties. However, some student loan companies allegedly fail to consistently offer the necessary information and support, with complaints suggesting that they may even provide false statements about bankruptcy protections or continue collecting debts discharged by bankruptcy judges. While bankruptcy can provide a path to discharging student loan debt, it is not a straightforward process. Federal student loans, for instance, are typically more challenging to discharge in bankruptcy due to their increased benefits and protections. To discharge student loan debt in bankruptcy, individuals may need to demonstrate undue hardship and file an adversary proceeding, showing they cannot maintain a minimal standard of living while repaying the loans. Even with these challenges, some borrowers have successfully navigated the bankruptcy process to find relief from their student loan burdens.
| Characteristics | Values |
|---|---|
| What happens to student loans when you file for bankruptcy? | Collections and payments on student loans and other debts are automatically paused until the case is over or a judge orders the resumption of payments. |
| What happens if my student loans aren't discharged in my bankruptcy case? | Your student loans will not be automatically discharged if your bankruptcy is approved. |
| What is the process for filing for bankruptcy for student loan debt? | Filing for bankruptcy involves submitting a petition to the bankruptcy court detailing your debt, assets, income, and expenses. You may have to complete credit counseling, pay filing fees, and attend a meeting with your creditors. |
| What is an adversary proceeding? | An adversary proceeding is a separate filing with the bankruptcy court in which you seek relief from private student loan debt. It is similar to a civil lawsuit, and you must demonstrate that repaying your student loans would cause undue hardship. |
| What are some alternatives to filing for bankruptcy to discharge student loan debt? | There are a few alternatives, such as pausing payments through deferment or forbearance, enrolling in an income-driven repayment (IDR) plan, or negotiating a settlement with your loan holder. |
| What are some considerations for discharging student loan debt in bankruptcy? | Federal student loans typically have more protections and are more challenging to discharge than private student loans. Additionally, paying off student loans with unsecured debt or non-student loan products before filing for bankruptcy may be considered fraud. |
| What are some challenges or concerns regarding discharging student loan debt in bankruptcy? | Student loan borrowers often rely on their servicers for information and support, but complaints suggest that companies may provide false statements about bankruptcy protections or violate discharge orders by unlawfully collecting on discharged debts. |
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What You'll Learn
Student loan bankruptcy discharge process
Bankruptcy is a last-resort option for discharging student loan debt due to its potential negative impact on your credit score and the costs and time involved in filing. However, it is possible to discharge federal and private student loans through bankruptcy. Here is a step-by-step guide to the student loan bankruptcy discharge process:
Step 1: Consult an Experienced Bankruptcy Attorney
If you are struggling with debt that includes student loans, consider consulting an experienced bankruptcy attorney. They can advise you on your options and guide you through the complex legal process.
Step 2: File for Bankruptcy
If you decide to proceed with bankruptcy, you will need to file for it. This process involves gathering the necessary financial information and completing the required legal paperwork. Once you file, any collections and payments on your student loans and other debts will be automatically paused until the bankruptcy case is resolved or a judge orders a resumption of payments.
Step 3: Petition for an Adversary Proceeding
If your bankruptcy is approved, your student loans will not be automatically discharged. You must actively seek a discharge by petitioning the court for an adversary proceeding. This is a legal process where you request the court to determine if your student loans can be eliminated.
Step 4: Demonstrate Undue Hardship
During the adversary proceeding, you must demonstrate to the court that repaying your student loans would cause you "undue hardship." This typically involves showing that:
- You lack the present ability to pay (your expenses equal or exceed your income).
- Your hardship is likely to continue for a significant portion of the loan repayment period (due to retirement, disability, chronic injury, unemployment, lack of a degree, etc.).
- You have made good-faith efforts to repay your loans before filing for bankruptcy (exploring repayment options, contacting the Department of Education or loan servicer, etc.).
Step 5: Court Decision and Possible Appeals
After considering the evidence and arguments presented, the bankruptcy judge will decide whether to grant a full or partial discharge of your student loans. If the judge does not find undue hardship, you may have the option to appeal the decision or explore other debt management options, such as deferment, forbearance, income-driven repayment plans, or negotiating with your loan holder.
It is important to note that the student loan bankruptcy discharge process can be complex and may vary depending on your specific circumstances and the jurisdiction in which you file for bankruptcy. Therefore, seeking legal advice from a qualified professional is essential.
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Adversary proceeding
An adversary proceeding is a legal process that takes place as part of a bankruptcy case. It is used to resolve specific issues or disputes that arise during the bankruptcy case. In the context of student loan bankruptcy, an adversary proceeding is filed to seek the discharge of student loans that would otherwise not be dischargeable. This is because student debt is ordinarily exempt from discharge, and one has to prove that repaying their student loans is causing undue hardship.
The undue hardship standard has three main criteria for discharge:
- The debtor is currently unable to make their student loan payments while maintaining a minimal standard of living for themselves and their dependents.
- The debtor's financial circumstances are not going to improve in the future, and the hardship will continue for a significant amount of the time left on repaying the loans.
- The debtor has made a good faith effort to repay their loans prior to filing for bankruptcy.
To evaluate these criteria, the court requires the debtor to serve a complaint to the defendant, which outlines their financial circumstances and explains how repaying their student debt would qualify as undue hardship. The debtor must also fill out an attestation form, which asks questions about their income, expenses, and student loans. The government is represented by the Department of Justice (DOJ) in the adversary proceeding, which will ask the debtor to fill out an attestation of undue hardship at the beginning of the proceeding.
If the DOJ agrees that the debtor is experiencing undue hardship, it will recommend that the judge give a full or partial discharge of the student loans. If the debtor's bankruptcy case has already been approved, they can still ask the court to reopen their case and request an adversary proceeding to try to discharge their student loans.
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Undue hardship
While it is difficult, it is not impossible to discharge student loan debt in bankruptcy. If you file for bankruptcy, collections and payments on your student loans and other debts will automatically be paused until the case is over or a judge says that payments should restart.
To have your student loans discharged in bankruptcy, you must show that you have an undue hardship. It is up to the court to decide whether you have an undue hardship. The factors considered when deciding whether or not 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, it will be determined 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? If you are in retirement, have a disability, have a chronic injury, have a long history of unemployment, don't have a degree, or have been in extended repayment status, it will be assumed that you do not have the ability to pay in the future.
- 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 regarding payment options for your loan prior to filing for bankruptcy?
If the Department of Justice (DOJ) agrees that you are experiencing an undue hardship, it will recommend to the judge that they give you a full or partial discharge of your student loans. Even if the DOJ does not recommend discharging your loans, the judge does not have to agree with their recommendation and can still find that you have an undue hardship and discharge your loans.
If a judge doesn’t find that you have an undue hardship, you may be able to appeal the decision or look into other options for managing your student loan debt, including pausing your payments through deferment or forbearance, lowering your payments by enrolling in an income-driven repayment (IDR) plan, or negotiating a settlement with your loan holder. If your bankruptcy was already approved, but you did not ask the court to make a determination of undue hardship before the case was closed, you can ask the court to reopen your bankruptcy case.
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Income-driven repayment plans
If you're struggling to pay off your student loans, bankruptcy might seem like a viable option. However, it's important to note that declaring bankruptcy does not automatically discharge your student loans. While bankruptcy can provide temporary relief from loan payments, your student loans will likely remain intact unless you can prove undue hardship.
Proving undue hardship involves demonstrating that you don't have the ability to pay off your loans now or in the future. Factors such as retirement, disability, chronic injury, long-term unemployment, lack of a degree, or extended repayment status may be considered when determining your ability to pay. Additionally, you must show that you've made a good-faith effort to repay your loans before filing for bankruptcy.
Even if the Department of Justice (DOJ) doesn't recommend discharging your loans, a judge can overrule their decision if they find that you're experiencing undue hardship. In such cases, your student loans may be partially or fully discharged.
If you're facing challenges in repaying your student loans, consider exploring alternative options before opting for bankruptcy. One option is to enrol in an income-driven repayment (IDR) plan, which can lower your monthly payments. IDR plans include the Income-Based Repayment Plan, Pay As You Earn (PAYE), and Income-Contingent Repayment (ICR) Plan. These plans base your monthly payments on your income, making them more manageable. Additionally, you can use the Loan Simulator to compare different repayment plans and find the one that best aligns with your financial situation and goals.
Applying for an IDR Plan is a straightforward process if you provide consent for the Department to access your federal tax information directly from the Internal Revenue Service. This simplifies the application process and enables automatic annual recertification of your IDR plan. By switching from the SAVE Plan to an IDR plan, you can benefit from quicker processing times and access important loan benefits. Remember, it's always a good idea to contact your loan servicer or the Department of Education to discuss payment options and explore all available alternatives before making any decisions regarding bankruptcy.
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Bankruptcy fraud
Bankruptcy is a legal process that can help individuals and businesses eliminate or repay their debts under the protection of the federal bankruptcy court. While bankruptcy can be a way to get a fresh start, it is not a cure-all for financial problems and has long-term financial and legal consequences. It is difficult but not impossible to discharge student loan debt in bankruptcy.
Common forms of bankruptcy fraud include individuals filing false or incomplete forms, including multiple filings in different jurisdictions, bribing court-appointed trustees, and concealing assets by transferring them to friends or relatives. Nearly 70% of all bankruptcy fraud involves the concealment of assets, which can make loans more expensive and impact creditors' ability to liquidate assets.
Petition mills are another type of bankruptcy fraud scheme, where companies pass themselves off as consulting services to help individuals facing financial difficulties, but instead file for bankruptcy on their behalf and charge exorbitant fees, leaving clients with ruined credit scores and no savings.
If you suspect bankruptcy fraud, you can report it to the US Department of Justice by providing information such as the name of the bankruptcy case, case number, location, identifying information about the individual or business involved, and a brief description of the alleged fraud, including any supporting documentation.
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Frequently asked questions
Collections and payments on your student loans will be paused until the case is over or a judge says that payments should restart.
You must file an "adversary proceeding" along with a Chapter 7 or 13 petition and demonstrate an "undue hardship" at trial.
You must prove a current and future inability to pay, due to circumstances like disabilities, low wages, retirement age, or protracted unemployment history.
You may be able to appeal the decision. You can also explore other options such as pausing payments through deferment or lowering payments with an income-driven repayment (IDR) plan.
