To get back on the path to financial relief, can you file bankruptcy on student loans? The answer is straightforward, but the process is not. This post will explore what you need to know as you consider your bankruptcy options.
Why File Bankruptcy?
Financial stress can be debilitating. If you are behind on your student loan payments, you may be considering filing bankruptcy.
The good news is that federal law gives you the right to declare bankruptcy and get relief from your creditors. The bad news is that it comes at the expense of your credit and is a long process.
But the fact is, bankruptcy gives you the chance to wipe your financial slate clean. It’s the right choice if you are looking for a start fresh.
What Happens to Student Loans in Bankruptcy?
So, can you file for bankruptcy to wipe out student loans? Yes, but only if you can prove “undue hardship.” To do this, you will need to make a compelling case that you cannot repay your student loans.
Courts will decide whether you can discharge your student loan debt in bankruptcy using a legal standard. Most courts will use the “Brunner Test” to evaluate hardship. Under it, your student loan debt will be forgiven if you can prove three things:
- Poverty – You couldn’t maintain a basic standard of living with your current income and expenses if you continued repaying your loan.
- Persistence – Your current financial hardship will likely last for the majority of the repayment period.
- Good faith – You sincerely attempted to repay your student loans in the past.
Some courts use other tests as well. The totality of the circumstances test looks at all relevant facts in your case to determine undue hardship. A special test for Health Education Assistance Loans (HEAL) requires you to prove two things: (1) that your loan became due more than seven years ago; and (2) repayment will be an “unconscionable” burden on you.
Even if you are successful in proving hardship, the judge could decide to have only a portion of your loan forgiven. If not discharged, you could end up with a restructured loan where you repay under new and easier terms.
You have a better chance of having your student loan discharged if your loan is from a for-profit vocational or trade school. You will have to argue that there was a breach of contract. Or you could convince the judge that the school’s practices were deceiving, unfair or fraudulent.
Consider Other Options First
Because of the difficulty in getting student loans discharged in bankruptcy, you should first consider alternate repayment and forgiveness options.
Bankruptcy should be the last resort for you to resolve your debt issues. There are other solutions that could help relieve your student loan debt.
You should talk to your lender about any hardship programs it may have. Also, look into programs like income-driven repayment plans, deferment or forbearance. Under the Public Service Loan Forgiveness (PSLF) program, you could work for a government agency or non-profit and have your loan forgiven.
The Process for Discharging Student Loan Debt in Bankruptcy
If you want to discharge your student loan debt in bankruptcy, you will need to take three steps:
- Hire an experienced bankruptcy attorney – You could represent yourself through bankruptcy proceedings. But, making a case for discharging student loans in bankruptcy is more complicated.
- File bankruptcy – Your lawyer will help you decide whether you should file for Chapter 7 or Chapter 13 bankruptcy. Chapter 7 is a shorter process that eliminates all unsecured debt. Chapter 13 restructures your debt so that a portion of it is repaid through a plan that could last up to five years.
- File an adversary proceeding – Next, your attorney will have to file an “adversary proceeding.” You will present evidence and prove to the court that payment of your loans will cause an undue hardship. This lets the bankruptcy court determine whether your loan could be discharged.
What If Your Student Loans Aren’t Discharged?
In most cases, student loans are not discharged in bankruptcy. When this happens in a Chapter 7 bankruptcy, you will still have to make payments after you complete bankruptcy proceedings. After a Chapter 13 bankruptcy, you could have reduced payments as a part of your repayment plan.
Contact an Omaha Bankruptcy Attorney Today
If are thinking of filing bankruptcy on student loan debt, an experienced local bankruptcy attorney can help. Hiring an effective attorney can secure your financial future. At Burke Smith Law, we can help you determine whether filing is a good option for you. Our Omaha, Nebraska bankruptcy lawyers pride themselves on the high level of service provided to all of our clients.