Filing Bankruptcy on Student Loans

Student loan debt is a significant financial burden for millions of Americans. While bankruptcy is often seen as a last resort for debt relief, many people are unaware that, in certain circumstances, it’s possible to discharge student loans through bankruptcy. However, it’s a complex process with specific legal requirements. This blog post will help you understand how bankruptcy can affect student loans and provide a guide to navigating this difficult decision.

Table of Contents

1. Understanding the Basics of Bankruptcy
2. Types of Bankruptcy: Chapter 7 vs. Chapter 13
3. How Student Loans Are Treated in Bankruptcy
4. The Brunner Test: Qualifying for Discharge of Student Loans
5. Proving Undue Hardship: What You Need to Know
6. Steps to Filing Bankruptcy on Student Loans
7. Alternatives to Bankruptcy for Student Loan Relief
8. Conclusion

1. Understanding the Basics of Bankruptcy

Bankruptcy is a legal process designed to help individuals who are struggling with overwhelming debt. It offers a fresh start by eliminating certain types of debts or restructuring them to make repayment more manageable. While student loans are generally more difficult to discharge than other types of debt, bankruptcy can still provide some relief if you meet specific criteria.

2. Types of Bankruptcy: Chapter 7 vs. Chapter 13

There are two primary types of bankruptcy that individuals can file: Chapter 7 and Chapter 13.

• Chapter 7 Bankruptcy: Known as liquidation bankruptcy, Chapter 7 allows for the elimination of most unsecured debts, such as credit card debt. However, student loans are typically not dischargeable under this chapter unless undue hardship can be proven.
• Chapter 13 Bankruptcy: This form of bankruptcy is more focused on debt repayment. It involves creating a repayment plan that spans three to five years. While student loans usually aren’t discharged in Chapter 13, the payment plan can make it easier to manage student loan debt alongside other financial obligations.

3. How Student Loans Are Treated in Bankruptcy

Student loans are generally considered non-dischargeable debts in bankruptcy, which means they can’t be eliminated like credit card or medical debt. However, bankruptcy courts allow for an exception if the borrower can prove “undue hardship.” This is a stringent standard, and successfully discharging student loans through bankruptcy is rare, but not impossible.

4. The Brunner Test: Qualifying for Discharge of Student Loans

The Brunner Test is the most common method courts use to determine whether a borrower can discharge student loans due to undue hardship. To pass the Brunner Test, you must meet the following three criteria:

1. Inability to maintain a minimal standard of living while repaying the student loans.
2. The financial hardship must be expected to continue for a significant portion of the repayment period.
3. You have made good-faith efforts to repay the loans.

If you can meet all three of these criteria, the court may allow you to discharge your student loans in bankruptcy.

5. Proving Undue Hardship: What You Need to Know

Proving undue hardship is one of the biggest challenges when filing for bankruptcy on student loans. Courts will examine your current income, expenses, employment prospects, and other factors to determine whether repaying the loan imposes an undue financial burden. Documentation, such as income statements, medical records, and loan payment history, will be critical in this process.

6. Steps to Filing Bankruptcy on Student Loans

If you believe you meet the undue hardship criteria, here are the steps involved in filing for bankruptcy on student loans:

1. Consult with a Bankruptcy Attorney: An attorney specializing in bankruptcy law can help assess your case and guide you through the process.
2. File for Bankruptcy: You’ll need to choose between Chapter 7 or Chapter 13 and file a bankruptcy petition with the court.
3. File an Adversary Proceeding: This is a separate lawsuit within the bankruptcy case, specifically aimed at discharging student loans.
4. Prove Undue Hardship: You will present evidence to the court to demonstrate that repaying the loans causes undue hardship.

7. Alternatives to Bankruptcy for Student Loan Relief

Before considering bankruptcy, it’s essential to explore other options for managing student loan debt. These may include:

• Income-Driven Repayment Plans: These plans adjust your monthly payments based on your income and family size.
• Loan Consolidation: Combining multiple loans into one can make payments more manageable.
• Deferment or Forbearance: Temporary relief from payments may be available if you are experiencing financial hardship.
• Loan Forgiveness Programs: Public Service Loan Forgiveness (PSLF) and Teacher Loan Forgiveness programs may help eliminate student loan debt after a set period of qualifying payments.

8. Conclusion

Filing for bankruptcy on student loans is a challenging and complex process, but it may provide relief for borrowers facing extreme financial hardship. It’s essential to consult with a qualified attorney to explore your options and determine whether bankruptcy is the right choice for your situation. Additionally, consider other alternatives that could offer debt relief without the long-term consequences of bankruptcy.