Student Loan Bankruptcy - Discharge, Forgiveness, and Repayment Options
Well first of all, let us talk about bankruptcy in general regarding student loan. Discharging student loans via bankruptcy is pretty difficult but not impossible. You must be able to prove an undue hardship on you and your family in regards to clearing the loan which should then lead to the loan being discharged.
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So the courts will be evaluating you on many different criteria to check if undue hardship is the main reason for the discharge. This involves these steps.
The most common step is the Brunner standard which involves these -
The borrower is unable to maintain a minimal standard of living with the current income and expenses which is causing the dependents to pay for the loan repayments.
Additional factors which are indicating that this situation is not likely to resolve anytime soon and may persist for a significant period of time of the repayment period.
The borrower has made good efforts to stay in good faith to repay the loans the time period following up to declaring bankruptcy.
Most courts but not all of them use this test to assess and certify the eligibility of a claim for bankruptcy to discharge a loan.
Since this method was introduced during the year 1987 a lot has changed since and this has led some courts to question this standard and even consider whether they should start using a different standard.
For most federal courts this Brunner test seems to be the law but this appears to be changing nowadays.
If you are successful in proving hardship, your student loan can and will be completely discharged.
Filling for your bankruptcy also automatically protects you from the collection actions on all your debts for the time period of resolution of your bankruptcy or until the creditor gets the permission from the court to follow through with their duties.
If there may be a chance for you to discharge your loans through the declaration of hardship then it may be wise to follow through on the bankruptcy path.
But it is always a good idea to first consult with your lawyer or a lawyer who is more specialized in this field or a professional to be able to have a grasp at the pros and cons of this process or procedure.
For example, it is possible for bankruptcy to remain on your credit history for an extended period of up to 10 years.
There are a lot of costs associated with the filing of bankruptcy and also the procedural hurdles of the same.
There are also limits on how many times you may file for bankruptcy in a specified time so beware of the issues and take precautionary measures.
To get rid of or eliminate via a declaration of bankruptcy several types of student loans and debts will remain some of the few exceptions in this regard. But of late it has been difficult to get student loans discharged via the traditional procedures involving student loan bankruptcy declaration.
Regardless of how far behind you might be on your loan payments or regarding your income status discharging student loans via bankruptcy at this time is not a good idea. But there are indications that this can be in for a change in the near future
Student Loan Discharge options for you
Currently, traditional student loans bankruptcy is not yet a possibility, some processes can be utilized to make student loans get discharged, although the process can be a bit tedious.
This applies to both the federal and private student loans and is excluded from the traditional process involving the student loan bankruptcy options.
Congress has gotten the federal student loans to be ineligible for discharge to protect their solvency of the federal student loan program.
But there are certain standards that have been set that if verified can be taken as exceptions and loan be discharged. This is a very complicated process though.
(Also, recently a court case showed that discharge can be a possibility if the borrower is able to prove that the student loan did not lead to an "educational benefit" to him/her.)
Choosing to discharge your loans? Follows these steps
The first step is to get an adversary proceeding - this an actual lawsuit and is filed as a component of a student loan bankruptcy situation to get your student loans discharged. (but will be handle singly)
The second step involves proving "Undue financial hardship" to make sure you "Win" this lawsuit, you must prove to a judge that repaying this student loan would be an extreme financial hardship on you and your family.
And lastly, this hardship must meet a standard that is called the Brunner standard and to meet this standard there are 3 specific details to it -
You (and any of your dependents) cannot match a fundamental criterion of living with the current salary and also pay your student loans.
Your current financial status is going to have to remain for an extended period of time that will most likely cover the whole of your loan period.
You have to make a good faith effort to repay your loan before filing for a discharge.
These criteria for these details are very strict and usually pretty challenging to prove (some even claim it is "impossible"). Plus the attorney charges for even attempting a discharge are usually high which dissuades anybody from even bothering to attempt.
Proceed according to the courts' decision. That is if you are able to prove these criteria and get the federal student loan discharged, you will not be needed to make any additional payments. Collection calls will also cease at this point in time.
Options to consider if you are struggling to make payments on your student loans
Two options that we suggest you have a look at
Income-driven repayments - For federal student loan, try considering an income-driven repayment such as IBR or PAYE or REPAYE. Here your payment is based on your income family size and other such factors and is usually lower than the standard repayment play.
Usually given a significant period of time (usually around 20-25 years for an example) your federal student loans and not the private student loans are possible to be forgiven. However, you will probably be required to owe income tax based on the amount of student loan that is forgiven. So keep a look out on this option.
Pay off other consumer debt - As This high-interest rate debt like credit card debt, should be considered to be paid off first (especially if your interest rate is higher than your student loan interest rate). This can free up cash that can be applied to student loan debt reduction.
You may also be able to consider a personal loan to pay off your credit card debt. Credit card consolidation is the procedure where you pay off your existing credit card debt with a single personal loan which should cost a lot less in interest as compared to the credit card debt.
If this is possible make a personal loan at a lower interest rate than your credit card and you can save in the interest and possibly improve your credit score.
You should also have an open-minded approach and consider student loan repayment options and forgiveness before applying for bankruptcy this next section talks just about that.
Student loan repayment and forgiveness options
Is it possible to file for bankruptcy on a student loan? Should you? And the answer to these two questions is a maybe and it depends on you respectively.
Since Bankruptcy is complicated and an intrusive and extensive process. Some advice against the same as it is difficult to discharge loans through this mode and also it would be wise to steer clear of declaring bankruptcy in the first place also bankruptcy is a more drastic or complicated solution where there may be much simpler solutions for the same.
For example, federal student loans come with income-driven repayment plans or public service loan forgiveness programs which are a much less hassle compared to bankruptcy.
Public service loan forgiveness programs are for those who work for certain public service organizations such as a government agency or non-profit organizations.
When we come over to the private student loan side of things. It's always a sound way to start by talking to your loan servicer. Remember that you lose nothing by asking.
But always remember to look for options, research them, and look for ways other than to declare bankruptcy since you are fighting to discharge a loan from a system that was designed to not let your student loan debt be discharged and you should also maybe consider having a look into student debt relief.
Student loan discharge options in bankruptcy FAQs
How do I file for undue hardship?
Undue hardship can be proved via two ways -
The circumstances as they are would make it difficult for you to pay the required amount and/or be difficult for you to support the child on the amount of support you are currently receiving.
Your current standard of living is lower than your parents household standard of living.
How do you prove undue hardship?
As the borrower, the struggle of proving hardship is solely yours. To be successful in convincing the court so as to be able to discharge your loans, you be required to produce records that are meticulous in nature.
Having proof of documentation that shows that it would be very difficult for you to maintain a standard of living that is minimal in nature should suffice.
What is considered an undue hardship?
Undue hardship is defined as any action that requires significant expense or difficulty in terms of being dealt with when taking into consideration a number of factors
Are student loans forgiven after 10 years?
Borrowers in the income-driven repayment plans are eligible for loan forgiveness after a period of 20-25 years, but for those working full time for a public service or nonprofit employer can have this term shortened to 10 years with public service loan forgiveness program. But borrowers who repaid their student loans using graduated or extended plans are not eligible for public service loan repayment plan.
Can bankruptcy get rid of student loans?
Most often the borrowers will not be able to discharge their student loan debt using chapter 7 or 13 bankruptcy. But if you are able to prove that an undue hardship shall ensue if you progress to making payments towards the student loan you should be able to get rid of the loan via filing for bankruptcy.
How do I prove undue hardship for student loans?
To prove the undue hardship for student loans. It is completely up to you to prove the same. to succeed in proving the court of your undue hardship and to discharge your loans. you will be required to provide meticulous details on your financial records.
You should keep at hand all the documentation that would show that you will be unable to maintain a minimal standard of living without forgoing the payments to this loan.
Can I file bankruptcy on my private student loans?
Since the time Congress passed the bill that states Bankruptcy abuse prevention and consumer protection act of 2005, Both the types of loans that are federal and private have turned more difficult to discharge in the state of bankruptcy compared to other types of debt. But they can still be discharged in bankruptcy if the borrower is able to prove undue hardship in the repayment of that loan.
What other options do I have to pay back my student loan other than bankruptcy?
Well, sometimes you may be eligible for student loans repayment programs such as the Public service loan forgiveness where you work in a public service job which is a necessity such as a teaching job and more.
After working for about 10 years you become eligible for loan forgiveness for the rest of the pending amount that might be due further. After applying and being approved you may be discharged of the loan. But beware that you may be required to pay income tax on the loan amount that you will be relieved of.