What Happens to Student Loans in Bankruptcy?
If you are struggling to repay your ballooning student loan debt, then seeking a bankruptcy discharge may have crossed your mind. And you are not alone. Many borrowers, who are striving to repay their student loans, are considering the same option.
Recent studies reveal that there are more than 44 million borrowers, who collectively owe $1.5 trillion in student loan debts, in the United States alone. Most of these borrowers are actively exploring bankruptcy discharge as a solution to their financial woes.
Can Student Loans Be Discharged?
Getting your loan debt discharged is possible, but the process may be somewhat challenging. Under the current law, student loans can’t be claimed through bankruptcy, except in certain circumstances. The only way to have your loan discharged is if they are found to cause “undue hardship.”
What is the Probable Success Rate if You Seek Student Loan Bankruptcy?
Some studies show that only 0.1% of student loan borrowers, who declare bankruptcy, try getting their loans discharged. Besides, just 0.4% of people, who filed for bankruptcy and sought to have their loans discharged, received either full or partial discharge of their student’s loan.
Unlike consumer debt, such as credit card and mortgage debt, or civil litigations, the student debt loan, traditionally, cannot be quickly discharged. The explanation for this arose from a concern that student loan borrowers could take advantage of bankruptcy laws to borrow large sums of money then file for bankruptcy, soon after graduating from college.
As a result of this, discharging student loans is one of the most challenging processes. However, discharging your debt is not entirely impossible. There are some avenues that you can explore. If you intend to get out of your loans in a bankruptcy, you must understand the requirements to qualify.
How can you Prove Undue Hardship?
The first step for you to file for a student loan discharge is to prove the loan has caused undue hardship to you and your dependents. Unfortunately, bankruptcy law is not clear on what constitutes an undue hardship. Congress failed to come up with the meaning of undue hardship. As a result, the courts have been left to define what this term means.
There are two different tests that the courts can use to decide whether you are experiencing undue hardship from your student loan. These tests are The Brunner Test and The Totality of Circumstances Test.
The Brunner test – Under the Brunner test, you must prove three things, namely:
- You must demonstrate that you cannot maintain based on your current incomes and expenses, a minimal criterion of living for yourself and your dependents, if forced to repay your student loans.
- You must also prove that there are additional circumstances, which exist indicating that the state of affairs mentioned in number one above, is likely to persist for a significant portion of the repayment period of the student loans.
- Lastly, you must prove that you have made every effort to repay the loan with no or minimal success.
Totality of Circumstance Test – Totality of circumstance test refers to a method of analysis where decisions are based on the available information, rather than the standard rules. Under this test, the courts focus on all the circumstances of a particular case rather than on one factor. The court may consider your past and current credit history as well as your future financial resources.
The court also looks at your dependent’s necessary living expenses and any other relevant facts and circumstances applicable to your bankruptcy case. Under this test, the court may consider hardship when the existence of the debt causes, for example, mental illness or has prevented you from accessing effective treatment.
How to Initiate your Student Discharge in Bankruptcy Proceedings
The first step for you to kick start the proceedings, is to determine whether you meet the standard of undue hardship. It is essential to solicit the services of a bankruptcy lawyer to analyze whether your situation meets the standards set by the law. In case you don’t meet the standards, your lawyer can guide you on other circumstances, which you can use to claim your discharge, such as if you are living with a disability or a terminal illness.
If you reach the criteria of undue hardship, then, with the guidance of your lawyer, you need to prepare thoroughly for the proceedings. Discharging a student hardship involves extra work on top of the standard bankruptcy proceeding. The lender will most-likely defend themselves against the bankruptcy discharge.
Preparation for the Proceeding
Collect all vital information on your income, budget, and debt burden, relevant to the court proceedings. Important information about your dependents should also be collected. Besides, if you are suffering from terminal diseases or you are living with a disability, you must get all the necessary details to support your claim in court.
In addition to this, you should also compile all the information that proves that you made a lot of progress in repaying your loans in the recent past. One of the factors the court will consider in determining your case is whether you made any effort to repay your loans in the past. If you haven’t made any payment, then consider contacting your loan service and request for an alternative payment schedule.
Expected Outcomes
Once you have decided to pursue student loan discharge in bankruptcy, the following are the possible outcomes:
- Full discharge
The court may choose to discharge your debt entirely. This means that you will not have to make any more payments for your student loans.
- Partial discharge
The court may decide to discharge a portion of your debt. You are then required to repay the remaining part, based on your circumstances and ability to repay. The court may decide to free you from repaying your private student loan but require you to repay your federal student loans.
- No discharge
The court may conclude that you are eligible to repay the full balance of your loan. However, the court may adjust other aspects of the loan, such as the interest rates.
It is crucial to note that even when you get a successful discharge of your student loan debt, the debt will still reflect in your credit records over a long period.
If you’re interested in learning more or would like to have a no-hassle consultation with an attorney, simply fill out this form.
Tejes Law is a Florida law firm serving clients in Central Florida. We focus on providing excellent customer service to our clients and practice primarily in chapter 7 bankruptcies, chapter 13 bankruptcies, probate, debt defense, foreclosure defense, student loan management, civil litigation, and estates and trusts.
