Student Loan Bankruptcy…Is It Possible?
Bankruptcy is a common, last ditch tool people use to gain relief from the crushing burden of debt. Filing for bankruptcy allows you to secure protection from creditors to help you repay part, or all, of your consumer debt. Bankruptcy is often only thought of as an option for those wanting relief from consumer debt like credit cards. Many believe that bankruptcy is not an option for student loans. In fact, bankruptcy for student loans is possible – in certain, extreme circumstances. If you’re asking yourself the question, “Can you file bankruptcy on student loans?” here are some things to keep in mind as you seek relief.
Can You File Bankruptcy on Student Loans?
Many people carrying substantial amounts of student loan debt fear they can never break free and experience freedom from their debt. It would make sense that such individuals would seek relief through bankruptcy. Yet, many believe the misconception that it is impossible to get student loans discharged in bankruptcy.
To be fair, not everyone who is struggling with student loan debt is able to file for bankruptcy to free themselves of their debt. It is actually very rare and the only way to do so is by proving extreme, or undue, hardship to justify your need for bankruptcy. Extreme hardship defined here essentially means that you are unable to maintain a minimal standard of living.
That being said, many take this difficulty as perceived inability to discharge student loans when filing for bankruptcy. Findings from Yale Law School professor Jason Iuliano bears this out in his 2011 study. Iuliano’s study shows that a mere .01% of those with student loans who file for bankruptcy include student loans in their proceedings.
Iuliano’s study shows that many believe the myth that it’s impossible to successfully pursue student loan bankruptcy. However, Iuliano shows that when borrowers do pursue protection, there are cases that have proven successful.
Circumstances When You Can File Student Loan Bankruptcy
As stated earlier, you must prove undue hardship in order to effectively discharge student loan debt in bankruptcy proceedings. Bankruptcy courts use various tests to determine whether or not you qualify to proceed. When it comes to student loans, one of the more common measurements courts use is the Brunner test.
The Brunner test is made up of three key parts:
- If you were to repay the student loans, you would be unable to maintain what is considered a minimum standard of living.
- Repaying the student loans means the undue hardship would continue for a significant portion of the loan repayment period.
- You have made a good faith effort to repay the loans before seeking bankruptcy protection.
The Brunner test is meant to reveal just how difficult of a situation repaying the loans will be for you – and that you have made a good faith effort to pay off the loans. Without a noted, serious effort to repay the loans, you will not pass the Brunner test and will likely be unable to discharge your student loans in bankruptcy.
Unfortunately, undue hardship is not clearly defined, making it difficult to clearly identify whether or not you qualify for student loan bankruptcy. The most successful cases tend to be when you have attended a school proven guilty of fraud, or you have some other circumstance that leaves you unable to repay the loans.
What Happens if the Court Rules That the Loans Cause Undue Hardship?
Passing the Brunner test does not guarantee the entirety of your student loan debt will be forgiven. As a part of your bankruptcy proceedings, your lawyer will help you file an adversary proceeding.
The adversary proceeding helps the court determine just how undue your situation would be to repay the student loans. This will help the bankruptcy court identify what type of discharge you qualify for with your particular situation. You will fall into one of three categories:
- Full discharge – Your student loans will be fully discharged and you will not have to repay the remaining loans, and all collection efforts will stop.
- Partial discharge – Part of your loan balance will be wiped out, but you will still owe on a portion of the student loans.
- Required to repay with new terms – If your student loans are not discharged, you may still qualify for new terms, such as a new loan term or an adjusted rate.
Work with your lawyer to ensure the best possible outcome. Each situation is unique, so it is important to state your case clearly to communicate your need.
Is Filing Bankruptcy on Student Loans is the Right Choice?
There are a lot of considerations to keep in mind when looking at bankruptcy. Not only does it stay on your credit report anywhere from 7-10 years, but it also can cost hundreds or thousands of dollars to file for bankruptcy. Either result can make it prohibitive to accomplish goals you have in life, not to mention the possibility of being unable to afford to actually go ahead with proceedings.
The situation is even more challenging when looking at bankruptcy and student loans. Yes, you can have the loans discharged in bankruptcy, but it becomes increasingly difficult if you are unable to pass the Brunner test.
Additionally, there are growing opportunities to help individuals burdened with overwhelming student loan debt. You can apply for an income-driven repayment plan or forbearance. There are also a growing number of companies that offer student loan repayment as an incentive.
Bankruptcy for student loans is not meant as a way to escape repaying student loans. If you are legitimately overwhelmed with student loan debt, and it looks like you may be repaying the debt for decades, bankruptcy could be a valid option.
If that does not describe your situation, there are many other options you can look at before considering bankruptcy.
Other Strategies to Reduce Student Loan Burden
It’s no doubt that student loans can be overwhelming. With the average student loan being well over $30,000 per graduate and totaling over $1.3 trillion altogether, student loan debt can be suffocating.
If you are tempted by the idea of bankruptcy, there are other strategies that can help you reduce the burden of student loans. Some of those options are:
- Refinancing your student loans. If you have not refinanced your loans, you may be able to lower the interest rate, saving you money and making payments more manageable. Make sure to compare student loan refinancing rates to find the best one available. Consolidation is also an option if you already have low rates.
- Relocating to a cheaper cost of living area. If you live in a high cost of living area, you may be taking money away from repayment efforts.
- Look at your budget. If you are living significantly above your means, identify areas to cut back and throw the savings at your loan balance.
- Apply for income-driven payments or a forbearance of payments. Just be aware that while this may lower payments, it may also extend the term.
- Find a way to make extra money. Find opportunities outside of your job and throw the extra money at the loans.
- Ask your employer to help. Ask your Group Benefits area if they offer a program to assist with student loan repayment.
- Apply for Public Service Loan Forgiveness (PSLF). If you work for a government agency or non-profit organization and have made 120 consecutive payments, you may qualify for forgiveness.
There may be many other options to pursue before considering student loan bankruptcy. Make sure to find the best option for you to be effective with repaying your loans.
Bankruptcy and student loans are a genuine concern for many people. Yes, bankruptcy for student loans is a possibility, but make sure to pursue all your options before taking the plunge as success is very rare.