Bankruptcy is a legal process that helps individuals and companies get a financial do-over. The goal is to receive a discharge — a bankruptcy court order that permanently stops creditors from attempting to collect debts against you.
A bankruptcy discharge is permanent, but not all debt is dischargeable. Tax debts and child support cannot be discharged. Many individuals don’t realize they can file bankruptcy on student loan debt — a study found that only 0.1% of student loan debtors who have filed for bankruptcy attempt to discharge their student loans. Getting rid of student loans by filing bankruptcy is possible, however the process is difficult and can be time-consuming.
There are six types of bankruptcies, named as chapters. The two that apply to consumers with student loan hardship are Chapter 7 and Chapter 13. In a Chapter 7 filing, the debtor’s property can be sold to distribute the amount due to creditors. Chapter 13 filers can keep their property and repay the debt from their income over a period of three to five years.
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Can I Get Rid of My Student Loans By Filing Bankruptcy?
Filing bankruptcy on student loans may sound like an ideal solution to completely wipe out your student loan debt, but it’s not that easy. Not all student loan debt can be forgiven — federal student loans are non-dischargeable. It’s best to consult with an attorney to guide you through the process, especially because filing bankruptcy on student loans requires an additional lawsuit known as an adversary proceeding.
The success statistics of bankruptcy and student loans aren’t widely available because debtors who file for bankruptcy rarely request to discharge student loan debt. The key to a successful case is proving the student loan(s) are causing you hardship.
Proving Undue Hardships
If you can prove that paying off your student loans would cause you undue hardship, bankruptcy will help get rid of them. The U.S. Bankruptcy Code doesn’t detail undue hardship, leaving the term open for interpretation. However, there is a method most courts use.
The Brunner test (named after the case in which the standard originated) is the best option to determine if student loan hardship meets the bankruptcy court’s standard. The Brunner test is fact-intensive — courts will expect to see solid documentation and evidence of student loan hardship.
Can you file bankruptcy on student loans? The three Brunner test requirements you must meet for the best chance at a student loans bankruptcy discharge are:
1. Student loan payments would keep you from maintaining a “minimal standard of living”: You’ll need to show you have a pared-down lifestyle and are unable to earn more than you currently do. You must prove that, regardless of your attempts, you’re unable to support yourself and your dependents while paying your student loan debt.
2. It’s likely that your financial situation won’t change for the better part of your student loan term: You’d have to prove your circumstances will prevent you from paying your student loans for a long time. Some reasons may be limitations to the type of work you can do because of your education, long-term unemployment, or suffering from a serious medical disability.
3. You’ve made serious efforts to pay back your student loans: You’ll need to prove to the judge that you’ve made at least some loan payments and have attempted to negotiate a payment plan with the lender. If your lender won’t adjust your payments, document your communications as evidence. Note the name of the lender representative you spoke with, the date, and time of the call to show your attempts to the court.
The case will be judged based on your evidence. The best case scenario is you receive a full or partial discharge. The worst case scenario is no discharge at all.
Should You File Student Loan Bankruptcy?
If you’re wondering whether you should file for bankruptcy, the decision should not be taken lightly. The process is long and drawn out. And doing so will affect your credit score from 7 to ten years. If you’re still willing to move ahead with filing bankruptcy on student loans, consider these points:
- Have you exhausted all other payment possibilities?
- Are you close to defaulting?
- Is the debt affecting your ability to maintain a minimal standard of living for yourself and your dependents?
- Will your debts take more than five years to pay off?
- Are creditors suing you for debt payments?
- Are you considering tapping into your 401(k) account to pay your student loans?
- Do you live with a permanent disability that keeps you from making enough money to cover your student loan debt?
If you’ve answered yes to some of these questions, consult with a professional — filing for a student loans bankruptcy discharge may be the best option to clear your student loan debt.
How to Discharge Student Loans in Bankruptcy
If you’ve decided to move forward, here are the steps needed to discharge student loans using bankruptcy:
Find a Bankruptcy Attorney
An experienced bankruptcy attorney can walk you through the process. It’s not necessary to hire one, but bankruptcies are complicated. Consider help from a free legal clinic or legal aid society instead. The courts may decide that if you’re able to afford an expensive attorney, you may be able to afford to pay your student loans off.
File for Bankruptcy
Determine which type of bankruptcy you need to file. In a Chapter 13 bankruptcy, you may keep your property and repay your debt through a court-approved repayment plan over three to five years. In a Chapter 7 filing, you must turn over your property to be sold so a trustee can pay your creditors with the cash proceeds. If you’ve already filed for bankruptcy but didn’t request to have your student loans discharged, you can reopen the case to file an adversary proceeding for the student loan debt discharge.
File an Adversary Proceeding
Once you file for bankruptcy, you’ll also need to file a separate adversary proceeding to request a student loan debt discharge. You’ll need to round up additional documents to prove undue hardships since the court will expect to see factual evidence to determine student loan hardship.
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