Bankruptcy can be used to discharge student loans. The individual bankruptcy court will decide whether you meet the rigorous criteria that courts typically adopt to evaluate whether your student loans are eligible for discharge.
However, it does not follow that you should give up. You must demonstrate that repaying the loans puts you and your dependents through an “undue hardship” to have private and federal student loans dismissed in bankruptcy effectively.
That is a higher bar than what bankruptcy filers must establish to be granted the discharge of credit card debt, personal loans, or past-due utility bills. However, if you have a case for it, it’s frequently good to make an effort to demonstrate that you satisfy this criterion.
If your loan payments are unmanageable, there are alternatives to bankruptcy that you should first investigate because filing for bankruptcy has adverse effects on your credit and financial future.
Here are some ways bankruptcy can eliminate or significantly lower student loan debt if it’s the best option for you.
What Should I Know About Bankruptcy?
Chapter 7 bankruptcy, which is the most prevalent, and Chapter 13 bankruptcy, are the two types of bankruptcy. If you file successfully in either situation, you won’t be required to pay back some debts, and wage garnishment and other debt collection efforts will stop.
Those who file for Chapter 13 bankruptcy and make a steady income are given a three- to a five-year payment plan to pay off their obligations. After that, the remaining debt is forgiven.
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There is no payment schedule or discharge under Chapter 7 bankruptcy, but your eligible assets will be liquidated to settle your obligations. Any outstanding debt will then be discharged.
The bankruptcy will show up on your credit report for ten years if you file under Chapter 7 and 7 years if you file under Chapter 13.
Additionally, if you don’t pick Chapter 13, you risk losing the assets you used as security for unpaid secured debt, like a mortgage protected by a lien or other legal claim.
What Is Bankruptcy For Student Loans?
An existing Chapter 7 or Chapter 13 bankruptcy file and a student loan bankruptcy are two different legal proceedings.
The bankruptcy court must receive an adversary complaint from debtors who want to discharge their school loans through bankruptcy.
The court will assign the adversary complaint a different case number from the active bankruptcy case after the protest against the lender is filed.
You claim that you don’t make enough money to pay back your student loan debt without suffering financial hardship by filing this case.
The requirements to satisfy the court will depend on which means test is applied to your case during this separate hearing, and you will need to present evidence to support your claim.
Does Bankruptcy Clear Student Loans?
Bankruptcy does not always automatically discharge student loans. Student loans are not included in a typical bankruptcy procedure, even if Chapter 7 or Chapter 13 bankruptcy filings may be able to remove some consumer obligations.
While it is possible to discharge student loans through a separate bankruptcy petition, the procedure is expensive and complicated.
Borrowers must also adhere to tight requirements to clear student loans in this manner, and only those with unique circumstances can succeed.
Even if a bankruptcy court successfully discharges your student loans, the bankruptcy and canceled loan account will remain on your credit report for up to 10 years.
How To Get Student Loans Discharged In Bankruptcy?
To be discharged from bankruptcy, student loans must pass an additional examination. The Brunner test, named after a 1987 court case, is frequently used by courts to decide if your debt poses an “undue hardship” for you and your dependents.
By proving the following, you can establish excessive hardship:
- Repaying student loans prevents you from maintaining a “minimal” standard of living for you and your dependents, according to your current income and expenses.
- This will likely not change throughout the repayment of the loans.
- Until now, you have done your best or made a “good faith” effort to pay off the loans.
You must finish a required credit counseling course before petitioning for bankruptcy. After that, you must provide the U.S. Bankruptcy Court with information regarding your debt and financial position.
You must demonstrate that you cannot pay the bills according to your means to commence with a Chapter 7 process. A bankruptcy trustee will be chosen to manage the Chapter 7 asset liquidation process and the Chapter 13 repayment plan.
You’ll need to go through an additional procedure after declaring bankruptcy to ask for your student loans forgiven.
This is referred to as an adversary proceeding. It will ask the court to assess whether you fulfill the criteria for undue hardship based on the financial information you present in your petition.
When you file for bankruptcy, you must pay a filing fee and any legal costs. The difficulty of eliminating college debt in bankruptcy makes hiring a lawyer a good choice.
A skilled attorney can assist in creating a compelling adversary proceeding and offer guidance on the steps to take to achieve the best possible result for you.
You may want to consider filing for Chapter 13 bankruptcy if you can’t demonstrate undue hardship, in which case you’ll get a new monthly student loan payment based on your court-ordered payment plan.
As a result, you could be able to make a smaller payment or choose to pay off your debts more quickly while making smaller payments on other debts. When the three to five years are up, you could subsequently try to have the remaining balance discharged on the grounds of excessive hardship.
Student Loan Alternatives To Bankruptcy
Most experts consider bankruptcy a last option for borrowers since it may be costly and time-consuming.
After you have exhausted all other options, such as debt consolidation, credit counselling, and negotiating with creditors for a reduced payment or interest rate, you may want to consider filing for bankruptcy.
Bankruptcy may be able to offer assistance if you’re juggling student loan payments with other expensive, dischargeable debts like credit card and medical bills. However, consider these options if paying off student loans is your only worry.
Income-Driven Repayment Plans
Numerous crucial consumer safeguards apply to federal student loans, but the income-driven repayment (IDR) scheme may be the most helpful to borrowers.
With this, your monthly payments are capped at a specific proportion of your income, and any outstanding debt is canceled after 20 or 25 years.
On studentaid.gov, you can make a free online application. This option is not typically available from private lenders.
Federal Loan Rehabilitation
You can choose a structured road out of default if your federal student loans have already entered default, which is defined as being at least 270 days past due for most student loans.
You must pay nine on time, 15% of your salary, in monthly installments for rehabilitation. If you are successful, the default notation will be removed from your credit report. You might apply for an IDR plan to make the remaining payments more reasonable.
Federal Loan Consolidation
Consolidation is an additional post-default option for federal student loans; in this case, you would either combine all of your federal loans into one loan and make three on-time payments per month, or you would agree to repay the consolidation loan under an IDR plan.
Your loans won’t be in default at that point. However, the mention will remain on your credit report, unlike after rehabilitation.
Private Loan Modification Or Settlement
Depending on the lender, you may have many options to lower your private loan installments or exit default.
If you can’t continue making payments, speak directly with your private lender or servicer to look into loan modification options.
You might consider coming to a settlement with the lender or collection agency if you’re behind on your loans.
You would then make a lump sum payment that was less than the total amount still owed. But this sum might be taxed, and you might not be able to afford it.
If you’re in contact with a collection agency regarding a settlement, seek advice from a tax expert or student loan-experienced lawyer.