Filing Bankruptcy to Discharge Your Student Loan
You’ve probably read about how filing for bankruptcy doesn’t discharge student loans. This would be an oversimplification, however. The truth is that while discharging student loans in bankruptcy is harder than with other loans, there are some cases in which it is possible. The Fresh Start Through Bankruptcy Act of 2021, if it becomes law, could make it possible for student loan borrowers to seek bankruptcy discharge 10 years after their student loan payments come due. The law would also continue to keep the undue hardship discharge option open for loans that have been current for less than a decade.
Understanding student loan bankruptcy
A student loan bankruptcy isn’t a unique kind of filing. To file for bankruptcy of this kind, you’ll need to first either file a Chapter 7 or Chapter 13, and then file an adversary proceeding on top. Filing Chapter 7 or Chapter 13 requires a great deal of paperwork, and disclosure of information about what your assets are, how much you make, how much you owe and spend, and so on. The bankruptcy court names a trustee who gets together with your creditors, and makes sure what your debts are. You also need to submit to credit counseling before your case is taken up in court. Once you file, your creditors can’t bother you anymore, and your wage garnishment is suspended, as well.
While you do need to make the choice between filing for Chapter 7 or Chapter 13, there are other thoughts to keep in mind before making a bankruptcy filing.
You could end up deeper in debt: Filing Chapter 13, you could have the court lower your monthly student loan payments. This could mean that you end up paying more interest over time, however.
A lot depends on what kind of loan you hold: Since private student loans do not come with income-driven repayment plans but federal student loans do, private loans are easier to discharge in bankruptcy than federal loans. Courts don’t generally help you discharge your loans when you have the option of an income-driven plan.
Bankruptcy can be expensive: Entering your bankruptcy filing with an experienced bankruptcy attorney can greatly improve your chances of success. It’s important to keep in mind, however, that the courts sometimes believe that a debtor who is able to afford an attorney is probably able to pay off their student loans, as well. It can help to find a lawyer who is willing to work pro bono.
Filing an adversary proceeding
An adversary proceeding is a lawsuit required to help the court determine whether your debt really is dischargeable. In the filing, you need to state the reasons you seek to discharge your debt, and provide details of how exactly your circumstances constitute undue hardship. Proving such hardship is necessary to qualify for bankruptcy discharge. Even once you do win your adversary proceeding, you still need to make all the payments determined by the court, and discharge your other debts. Only then can you hope to have your student loans discharged.
To pass the undue hardship test, the court scrutinizes your life in the following ways:
- Has your income dropped below the federal poverty level for years with no signs of improvement?
- Have you been dependent on public assistance or the largess of someone in the family?
- Do you have a long-term injury or mental illness that keeps you from working?
- Do you have to take care of a sick child or spouse all day?
- Has divorce cut down on your family income?
If your financial situation is clearly beyond your ability to manage over the long term, and the court is able to determine that you don’t spend money on anything other than necessities, you could qualify as experiencing undue hardship.
There are other unique circumstances to consider
If your undue hardship is caused by physical or mental impairment, you may qualify for Total and Permanent Disability Discharge. You may not even need to file bankruptcy. You may also seek a discharge without bankruptcy in circumstances involving death, school closures, fraudulent certifications, unavailability of a refund and loan rehabilitation
The bottom line is that filing for bankruptcy doesn’t guarantee that you’ll come out successful discharging your student loan. A lot depends on the discretion of the individual judge assigned to your case. You’ll also be up against experienced attorneys representing the lenders, trying to show the court that you don’t qualify for discharge. This, in itself, is an important reason to find an attorney to file for bankruptcy discharge. If you win, you get a great deal of relief. You could have your loan repayments restructured so that they are easier for you to handle. If you lose, however, you’ll owe your student loans, and additional sums, including interest on unpaid installments, court fees, and collection costs. Only an experienced bankruptcy lawyer is able to tell you if your efforts are likely to result in success.