Despite what you may have heard, it is possible to discharge student loan debt in bankruptcy.
If your student loans are weighing you down, draining your income and damaging your credit, you’re probably looking for any way possible to make a fast exit. 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.
Is there any truth to the myth that student loan bankruptcy discharge isn’t possible?
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 that student loan borrowers must spend five years in repayment OR be able to demonstrate that undue financial hardship was being caused by their loans. Then and only then would a bankruptcy court be authorized to discharge federal student loans through the bankruptcy process.
Then, in 2005, Congress enacted the Bankruptcy Abuse 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 education debts cannot be discharged through bankruptcy, “unless excepting such a debt from discharge… would impose an undue hardship on the debtor and the debtor’s dependents.”
This essentially means that if a bankruptcy filer would continue to face undue financial hardship if their student loans were not discharged, then those debts can be discharged through bankruptcy.
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Understanding the realities of student loan bankruptcy discharge
So, the court may be willing to discharge all or part of your debt, depending on your situation. You can qualify for student loan bankruptcy discharge in both a Chapter 7 and Chapter 13 bankruptcy filing.
Basically, the court will consider how much your student loans will hold you back once they discharge all your other debts. If you’ll still be struggling 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 your student loans cause you 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. And you should be prepared 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 be prepared as you work to discharge student loan debt in bankruptcy.
Reality Check #1: 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.
Reality Check #2: 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.
Defining undue financial hardship through 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.
Reality Check #3: You’ll need a good 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.”
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Article last modified on June 25, 2020. Published by Debt.com, LLC