If student loans are draining your income and damaging your credit, you may be looking for any way possible to get rid of them. But like many people, you probably heard that you can’t discharge student loan debt in bankruptcy, no matter whether it’s federal or private. But the truth is that while student loan bankruptcy discharge isn’t exactly easy, that doesn’t mean that it doesn’t exist. In fact, as Steve Rhode, the Get Out of Debt Guy explains below, it’s more common than people think.
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The truth behind the myth that student loans can’t be discharged
The Department of Education has never been keen on allowing federal student loans to be discharged by filing for bankruptcy. In 1976, Congress amended the Higher Education Act (HEA) to make it harder to discharge student loan debt in bankruptcy. It required borrowers to spend five years in repayment OR demonstrate their loans caused undue financial hardship. Then and only then will a bankruptcy court authorize federal student loans for discharge.
Then, in 2005, Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act. One of the provisions of the act closed a loophole to include some private student loans. The BAPCPA basically expanded nondischargeability of student loan debt to include any debt owed to a Title IV school. However, the BAPCPA still stipulates that you cannot discharge student loans unless the debt “would impose an undue hardship on the debtor and the debtor’s dependents.”
This means you must show you would continue to face financial hardship if the court doesn’t discharge these debts. If you can prove this, then your loans can qualify for discharge.
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What happens to student loans in bankruptcy?
When you file for bankruptcy, the automatic stay will stop any collection actions related to your student loans. This includes wage garnishment, which in and of itself can provide some temporary relief. The stay will prevent wage garnishment while you go through the bankruptcy process.
When you file for bankruptcy, you list your student loans along with your other liabilities in your filing paperwork. In theory, you can qualify for student loan bankruptcy discharge, whether you file for Chapter 7 or Chapter 13. The court may be willing to discharge all or part of your debt, depending on your situation and level of hardship. You demonstrate this during the means test, which determines if you have sufficient income to repay your debt.
Basically, the court will consider how much your student loans will hold you back once they discharge all your other debts. If you would continue to struggle to make ends meet because of your student loan payments, then the court may decide to discharge at least some of those loans.
And while it may take some extra work to prove student loans cause undue financial hardship, it is possible. In fact, the Get Out of Debt Guy Steve Rhode says it’s more common than you think.
“Even federal student loan bankruptcy discharge is possible, although most people assume that it isn’t,” Rhode argues. “Both private and federal student loans are being discharged at an increasing rate.”
Rhode does admit that qualifying for discharge isn’t always easy. You need to prepare for a fight in court. But with the right information and team on your side, you can qualify successfully for student loan bankruptcy discharge. But Rhode says there are three basic realities you need to prepare for as you work to discharge student loan debt in bankruptcy.
Some loans are easier to discharge than others
“A private student loan for a school that isn’t Title IV-recognized, such as a trade or vocational school, is not protected in bankruptcy and can be discharged,” Rhode says.
If you attended a trade school and funded your education through private student loans, then these are good candidates for easy discharge. Those debts are not protected by the nondischargeability clause in the BAPCPA. The court will discharge these debts without any need to prove undue financial hardship caused by those loans.
Your lenders will fight you
“Lenders are fighting the easy discharge of student loans,” Rhode continues. “They want you to pay back the money you borrowed with interest. And they know that they have at least some protection under the law. They’re not going to make it easy on you to discharge those debts.”
Rhode says that even private student loan bankruptcy discharge can be an uphill battle if those loans paid for a Title IV education. But the good news is that there’s a test that bankruptcy courts use to determine if you fit the definition of facing undue hardship. It’s called the Brunner Test.
Student loans in bankruptcy: The Brunner Test
When the court needs to assess whether your student loans will continue to cause undue financial hardship, they consider three factors:
- Your student loan payments would not allow you and your dependents to maintain a minimal standard of living, given your current income and expenses.
- Your financial situation is unlikely to change in the foreseeable future, for at least most of the remaining time left in your student loan repayment period.
- You have made every good faith effort possible to repay your loans.
Just keep in mind that the courts will consider your situation based on your expenses once they discharge your other debts. So, if discharging things like credit card debt would fix your budget so you’d be able to afford your student loan payments, then you won’t qualify to discharge your student loan debt.
The court will also want to see that you’ve made every good faith effort to keep your loans out of default. This means that they want to see that you’ve tried things like enrolling in an income-driven repayment plan. These federal repayment plans match your monthly student loan payments to your income, making your payments easier to afford. If you haven’t tried any of these options, the bankruptcy court will be less likely to discharge your debt.
Getting the right attorney
In order to discharge any debt that’s protected from discharge by federal bankruptcy law, you must file an adversary proceeding. This is a separate action in addition to your regular bankruptcy case that starts the process of requesting discharge on nondischargeable debts. Once you request this, the court will assess your situation according to the Brunner Test.
“The unfortunate truth is that most bankruptcy attorneys are generally unfamiliar with the current state of discharge issues being battled in the courts,” Rhode says. “That means people struggling with debt are often unable to find an attorney who can represent them as they sue the lender to determine the dischargeability of the student loans. I predict student loans will become easier to deal with in bankruptcy. But, for now, it’s possible. But, it’s going to be a tough fight.”
Student loan bankruptcy FAQ
Q:Do I have to repay my student loans if I didn’t earn my degree?
You can’t use the fact that you did not earn your degree as a defense for why you should receive a discharge. That being said, if you have six-figure loans without a six-figure salary, then you may be able to demonstrate that your loans create undue financial hardship
Q:Can I use my credit cards to pay off my student loans and then file bankruptcy?
In reality, the credit card debt that you wish to discharge would need to be investigated or the creditor would need to challenge the discharge. If it is not challenged or reviewed then, in theory, you may receive discharge for it. According to Debt.com’s resident bankruptcy expert Steve Rhode, “In practice, I’ve seen credit cards used to pay off student loans fully discharged even though the rules said it shouldn’t have been. This has been especially true if you made the charges on your card a long time ago.”
The challenge is that you’re banking on a legal administration loophole. Since the law says the debt should not be dischargeable, you could get into trouble. You would not know if it would be discharged until you go through the filing process. It’s a big gamble.
Q:What happens to a student loan consigner during bankruptcy
For a cosigner to discharge their obligation to repay a cosigned student loan, they would need to pass the Brunner Test themselves. Essentially, even if a cosigner filed for bankruptcy because of their own debt, they would still be on the hook for the cosigned obligation. In order to get out of it, they would need to qualify for discharge under the Brunner Test.
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Article last modified on January 11, 2021. Published by Debt.com, LLC