Lori Meadows
Student loan debt is a heavy burden to bear, and bankruptcy is often seen as a last resort to manage or discharge this debt. While it is challenging to discharge student loans through bankruptcy, it is not impossible. The process has been streamlined in recent years, and federal borrowers have had more success in discharging their debt. To discharge student loans in bankruptcy, individuals must demonstrate undue hardship, showing they cannot make payments while maintaining a minimal standard of living and that this inability is likely to continue. This can be a complex process, and while bankruptcy provides a pause in collections and payments, it may not be the best option for everyone. Other options include income-driven repayment plans, loan forgiveness programs, and loan consolidation, which can provide long-term relief without the potential negative consequences of bankruptcy.
| Characteristics | Values |
|---|---|
| Possibility of discharging student loan debt in bankruptcy | Difficult but not impossible |
| Types of student loans that can be discharged | Federal, private, Direct Loans, Direct Consolidation Loans |
| Additional steps required | Adversary proceeding, adversary complaint, attestation form |
| Success rate | 98% of court decisions granted full or partial discharges as of mid-2024 |
| Factors considered by the court | Present and future ability to pay, good faith effort to repay, undue hardship |
| Bankruptcy types | Chapter 7, Chapter 13 |
| Chapter 7 bankruptcy | Requires income below a certain level, cancels all debt |
| Chapter 13 bankruptcy | No income requirement, involves a repayment plan for 3-5 years, known as a "wage earner's plan" |
| Automatic stay in bankruptcy | Prevents creditors from collecting debts, puts student loans into automatic forbearance |
| Interest accrual during bankruptcy | Interest continues to accrue, increasing the balance owed |
| Alternative options | Income-driven repayment plans (IDRs), loan forgiveness programs, loan consolidation |
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What You'll Learn
Student loan bankruptcy discharge process
While it is challenging, it is not impossible to discharge student loan debt in bankruptcy. Bankruptcy is often considered a last resort due to its potential impact on your credit score and the costs and time involved in filing. However, if you are overwhelmed by debt, consulting a bankruptcy attorney can help you explore this option. During the bankruptcy process, collections and payments on your student loans and other debts will be temporarily halted.
To discharge your student loans in bankruptcy, you must demonstrate undue hardship. This determination is made by the court, and the government is represented by the Department of Justice (DOJ) in this process. The DOJ will assess factors such as your present and future ability to pay, including your income, expenses, retirement status, disability, chronic injury, unemployment history, educational background, and previous repayment efforts. If the DOJ agrees that you are experiencing undue hardship, they will recommend that the judge grant you a full or partial discharge of your student loans.
Even if the DOJ does not recommend discharging your loans, the judge can still find that you have an undue hardship and approve the discharge. The type of bankruptcy case you file (Chapter 7 or Chapter 13) will also influence the judge's decision. Chapter 7 bankruptcy involves cancelling all debt for individuals with income below a certain threshold, while Chapter 13 allows individuals with regular income to create a plan to repay their debts over three to five years before the court discharges any remaining balances.
If your student loans are fully discharged, you will no longer owe any payments, and all collection activity will cease. A partial discharge means you will only need to repay a portion of the debt, possibly with restructured terms such as a lower interest rate. It is important to note that your student loans will not be automatically discharged upon bankruptcy approval, and you must take specific steps within the bankruptcy case to request a discharge from the judge.
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Chapter 7 bankruptcy
Student loan debt is a complicated issue, and bankruptcy is often a last resort due to its impact on credit scores and the time and costs involved. However, bankruptcy can provide a fresh start and a path to rebuild your financial situation.
During the Chapter 7 process, you can take a break from making regular loan payments, but interest will continue to accrue. Your loans may be sold or transferred, so it's important to communicate with your lender and keep records of any payments made. The process can take about four months, and a Chapter 7 bankruptcy will remain on your credit report for 10 years.
It is possible to discharge student loan debt in Chapter 7 bankruptcy, but it is difficult. You will need to initiate an adversary proceeding, where you must prove that your student loan debt has created an undue hardship. Federal student loans will require an attestation of undue hardship from the Department of Justice, which represents the federal government as the creditor. Even if the DOJ does not recommend discharging your loans, the judge can still find that you have an undue hardship and discharge them.
It is important to note that hiring a lawyer for your Chapter 7 bankruptcy and adversary proceeding may hurt your chances of discharging your student loans, as judges may assume that if you can afford legal fees, you can afford to pay back your loans. However, some individuals have successfully discharged their student loans through Chapter 7 bankruptcy, either with or without legal representation.
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Chapter 13 bankruptcy
To qualify for Chapter 13 bankruptcy, you must have a consistent income, have filed all the required tax returns for tax periods ending within four years of your bankruptcy filing, and meet other requirements set out in the bankruptcy code. It is important to note that if you continue to incur additional debt, you may not be able to take full advantage of the bankruptcy laws.
When filing for Chapter 13 bankruptcy, the debtor must compile comprehensive financial information, including a list of creditors with the amounts and nature of their claims, the source and frequency of their income, and a detailed list of their monthly living expenses. An impartial trustee is appointed to administer the case and ensure the household's financial position is evaluated accurately.
The debtor then proposes a repayment plan, making installments to creditors over three to five years. The plan must be submitted for court approval and typically involves regular, fixed payments. The court may extend the repayment period for cause, but it cannot exceed five years.
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Adversary proceedings
If you want to get your federal student loan debt discharged as part of your bankruptcy case, you’ll need to file an adversary proceeding (AP). An AP is a legal process used in bankruptcy court to resolve specific issues or disputes that arise during a bankruptcy case. An AP is a lawsuit within the bankruptcy case initiated by the filing of an adversary complaint. It is subject to Bankruptcy Rules that are almost identical to the Federal Rules of Civil Procedure.
To get your student loans discharged, you have to prove to the Bankruptcy Court that repaying your student loans is causing undue hardship and that you’ve made a good faith effort to repay your loans before filing for bankruptcy. This is done through an attestation form, which asks questions about your income, expenses, and student loans. This allows the bankruptcy judge to review your financial situation to see whether you meet the undue hardship and good faith effort standards. The government is represented by the Department of Justice (DOJ) in the adversary proceeding. At the beginning of the proceeding, the DOJ will ask you to fill out an attestation of undue hardship. If the DOJ agrees that you are experiencing an undue hardship, it will recommend to the judge that you receive a full or partial discharge of your student loans. The factors the DOJ and the court consider when deciding whether or not you have an undue hardship include:
- Present Ability to Pay: If your expenses equal or exceed your income, the DOJ will determine that you lack a present ability to pay.
- Future Ability to Pay: Can you show that your hardship will continue for a significant amount of the time left on 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, or have a long-term illness.
If a judge doesn’t find that you have an undue hardship, you may be able to appeal the decision. You can also 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.
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Income-driven repayment plans
While bankruptcy can help erase unsecured debts such as credit cards, student loans, and medical bills, it is not always a feasible option due to its potential impact on your credit score and the costs and time involved in the filing process. However, if you are overwhelmed by debt, including student loans, consulting a bankruptcy attorney about your options may be advisable.
If you decide to pursue bankruptcy, it's important to understand the different types:
Chapter 7 Bankruptcy
Chapter 7 bankruptcy involves asking a judge to cancel all your debt. To qualify, your income must be below a certain threshold, and you may be required to sell some of your assets to satisfy your debts. A Chapter 7 filing can remain on your credit report for up to 10 years from the date of discharge.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy, also known as a "wage earner's plan," is for individuals with a regular income. In this type of bankruptcy, you work with the court to create a plan to repay all or a portion of your debt over three to five years. After you've made payments according to the plan, the court will discharge any remaining balances. Chapter 13 bankruptcy can stay on your credit report for up to seven years.
The decision to file for Chapter 7 or Chapter 13 bankruptcy depends on factors such as your income and whether you have assets. Regardless of the type of bankruptcy, it is challenging but not impossible to discharge student loan debt. To do so, you must demonstrate undue hardship, which is evaluated by the court and the Department of Justice (DOJ).
Income-driven repayment (IDR) plans are specifically designed for federal student loans and link your monthly payment amount directly to your income and family size. In certain situations, your monthly payment could be as low as $0. After consistently making payments on an IDR plan for 20 to 25 years, any remaining loan balance is forgiven.
It's important to note that IDR plans are not the only option for managing student loan debt. Other possibilities include loan forgiveness programs, such as Public Service Loan Forgiveness or the Teacher Loan Forgiveness Program, and short-term solutions like deferment or forbearance, which allow you to temporarily stop or reduce your monthly payments.
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Frequently asked questions
Yes, it is possible to discharge student loan debt in bankruptcy, but it is a complicated process and is not a guarantee. You must be able to show that you are unable to make payments but have made a good faith effort to do so in the past.
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. You must also be able to show that repaying your student loans would cause undue hardship.
There are several federal government programs that can help make payments more affordable and provide long-term relief, including income-driven repayment plans (IDRs), loan forgiveness programs, and loan consolidation.
