One of our most frequently asked questions is the following: can you discharge your student loan debt in bankruptcy?
Normally, the answer is no. However; it could potentially change. While it is difficult to discharge student loan debt in bankruptcy, it’s not impossible.
Read on below to find out what you need to know about student loans and bankruptcy.
student loan debt in bankruptcy, bankruptcy lawyer

Student Loan Debt in the U.S.

Student loan debt is a huge burden on millions of Americans today. In fact, American college graduates as a whole owe over $1 trillion in student debt.

The Economist reported in June 2014 that U.S. student loan debt exceeded $1.2 trillion with over 7 million debtors in default. In 2014, there was approximately $1.3 trillion of outstanding student loan debt in the U.S. that affected 44 million borrowers who had an average outstanding loan balance of $37,172.
That means that 70 percent of American college graduates are battling student loan debt – that’s 1 out of 4 American adults!

The average American college graduate has $37,000 in student loan debt.

student loan debt in bankruptcy, bankruptcy lawyer
Source: Comet

And it’s only getting worse.

The Federal Reserve estimated that the average monthly student loan payment increased from $227 in 2005 to $393 in 2016. That’s a 73% increase!

Today, student loans are the second-highest consumer debt category in the U.S., right behind mortgages, and ahead of credit card debt.

The average monthly student loan payment increased 73% from 2005 to 2016.

It’s no wonder student loans are leaving college graduates drowning in debt.

If you’re feeling hopeless, like you’ll never get out of debt, you’re not alone. If your student loan payments are keeping you from paying your bills, putting food on the table, and obtaining affordable, safe housing, it may be time to consider your options.

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How to Discharge Student Loan Debt in Bankruptcy

Prior to 1976, you could easily discharge your student loan debt in bankruptcy. However, Congress changed the law soon after:

Student loan debt was only dischargeable if it had been in repayment for five years.

Then that period was extended to seven years.

In 1998, Congress decided student loans should only be dischargeable if they caused undue hardship to the debtor. In 2005, this rule was extended to private loans as well.

Some say it grew from a worry that students would take advantage of the system once they graduated – borrowing a ton of money, graduating, and then automatically filing for bankruptcy.

We know that student loan debt is more than just an annoyance – it’s a huge financial burden that affects your life and your future.

If you’re thinking about filing for bankruptcy to discharge your student loans, you should understand that it is tough, but not impossible.

In order to qualify, you must demonstrate that payment of your debt “will impose an undue hardship on you and your dependents.”

student loan debt in bankruptcy, bankruptcy lawyerHow to Prove Undue Hardship

There are several different ways courts can evaluate “undue hardship.” In the end, the test you take should show that paying your debt would impose significant financial hardship on you and your dependents.

The Brunner Test

  • Most common type of test

The Brunner Test is the most common way courts determine if you show undue hardship. Most courts use this test, but not all of them do. Except the First and Eighth Circuits, all federal courts of appeal use the Brunner Test.

The Eighth Circuit uses a totality of circumstances, and the First Circuit has not yet declared a standard test.

In order to qualify for student loan debt discharge, you must show:

  1. You cannot maintain a “minimal” standard of living for you and your dependents if forced to repay your student loans (based on current income and expenses);
  2. These circumstances are likely to continue for a significant portion of the repayment term; and
  3. You have made good faith efforts to repay your loans. This means that you have at least ATTEMPTED to pay your loans, like trying to find an affordable payment plan. This does NOT require payment of loans.

If you can prove the above, your student loan debt will be completely discharged. In order to do this, you will need to file an Adversary Proceeding (a bankruptcy court lawsuit). This is where you claim undue hardship.

If you’ve already filed for bankruptcy, don’t worry – you can still request undue hardship! You may reopen your bankruptcy case at any time to file this proceeding. Best of all, you should be able to do so without additional filing fees.

Chapter 11 of NCLC’s Student Loan Law publication includes extensive information about discharging student loans in bankruptcy.

student loan debt in bankruptcy, bankruptcy lawyer

Is discharging your student loan debt in bankruptcy right for you?

Don’t just jump right in. It’s important to consider how bankruptcy can affect your life outside of debt discharge. Consider the following pros and cons, and then talk to a bankruptcy lawyer about what may be the best option for you.

Pro: Automatically Protects You From Collections on Other Debts

One perk of filing for bankruptcy is that it automatically protects you from collection on your other debts, as well. Creditors cannot bother you until your bankruptcy case is resolved, whether it’s credit card debt or another type of debt.

Con: Can Stay on Your Credit Report for 10 Years

Filing for bankruptcy DOES affect your credit. Rebuilding your life after bankruptcy has its own challenges, such as higher interest rates, lower credit limits, difficulty qualifying for loans (i.e., mortgages, car loans).

Judges Want to Help Graduates Discharge Student Loan Debt in Bankruptcy

The good news is that while discharging student loan debt in bankruptcy is tough, some judges are willing to help. Examples include:

  • Encouraging bankruptcy lawyers to represent debtors for free
  • Canceling private student loan debt from unaccredited schools
  • Letting debtors make full payments during the Chapter 13 debt repayment period (up to 5 years)
  • Preventing and potentially eliminating future tax bills that could endanger student loan debt relief or cancellation after 25 years through federal student loan repayment programs

The laws may change; however, it’s important to move forward with the idea that they may not, to be safe.

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What are other options if I can’t discharge my student loan debt in bankruptcy?

If you don’t qualify for student loan debt discharge in bankruptcy, there are other ways to ease the financial burden of student loan payments.

  1. Check Out Student Loan Forgiveness Programs – Did you know that you can get a portion or all of your student loan debt forgiven? It’s true. Simply participate in one of the Student Loan Forgiveness Programs! There are a bunch of different types, so click on the link above to get more information and see if you qualify for any of them.
  2. Income-Based Repayment – If you are struggling with federal student loans, Income-Based Repayment (IBR), also known as Income-Driven Repayment (IDR), may be a great option for you. Examples of these programs include IBR, IDR, PAYE, and REPAYE. Each has its own pros and cons and what’s best for you may not be best for another person. Your payments are based on your income, family size, and a few other things. It typically ends up being cheaper than other repayment plans. The best part is that after a certain period of time has passed in repayment (usually 20-25 years), the rest of your public debt can be forgiven! Please note that you might owe income taxes on your forgiven student loan debt, though.
  3. Pay off Other Consumer Debt – If you have other debt with high interest rates, like credit cards, consider paying that off first. Once you’ve paid that off, it frees up money you can use towards your student loan debt payments. If you’re struggling, consider a personal loan to help you pay off debt. You can lower interest rates more easily that way. You can save money, consolidate your debt, get a lower interest rate, and improve your credit all at the same time!

Interested in Discharging Student Loan Debt in Bankruptcy?

If you’re interested in student loan debt discharge through bankruptcy, you need to consult with an expert. Talk to an experienced bankruptcy attorney at Davis Miles McGuire Gardner, PLLC, today!

student loan debt in bankruptcy, bankruptcy lawyer

Can you discharge student loan debt in bankruptcy? | Davis Miles McGuire Gardner, PLLC – Phoenix, AZ