We all know that in today’s economy, many people are plagued by huge student loan debt. Whether they have any real payment options depends on whether their student loans were borrowed through federal or private programs. With private student loans, you should be prepared to make the standard payment required because it is highly unlikely your lender will work with you when repayment time rolls around.
As a bankruptcy counselor, many clients tell me their bankruptcy attorneys say their student loans cannot be discharged in bankruptcy. But is it really an impossible task?
The Undue Hardship Test:
Without a doubt, student loans are seldom discharged in bankruptcy. Although a difficult standard to meet, it is not impossible. To discharge student loans through a bankruptcy filing, you must be able show that repaying your student loans “will impose an undue hardship on you and your dependents.”
The big problem is that different bankruptcy courts use different tests to determine whether the borrower can prove an undue hardship. And some courts are more flexible than others. So, it surely depends on how the court in the jurisdiction where you live analyzes the undue hardship standard.
One common test is derived from the Brunner case which requires the borrower to meet a 3-pronged test as follows:
- The debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for the debtor and the debtor’s dependents if forced to repay the student loans
- Additional circumstances exist indicating that this situation is likely to persist for a significant portion of the repayment period of the student loans
- The debtor has made good faith efforts to repay the loans.
Keep in mind that the word “undue” means you must be able to show an excessive or unreasonable hardship. Ordinary hardships, like the inability to find a good paying job, may not be enough. While some courts find that working in a low-paying career is a basis for discharge, other courts are not so sympathetic. They looked at whether it was the borrower’s choice to take the low-paying job over a better paying job. There have also been mixed results when borrowers try to show their financial problems will continue long-term. While some borrowers have shown that alcoholism was a reason for discharge, other courts did not view it as an insurmountable problem. This makes discharging student loans an unpredictable and uphill battle at best!
But the good news is if you can successfully prove undue hardship, your student loans can be fully discharged in bankruptcy. You should consult with at least 2 bankruptcy attorneys who are experienced with student loan claims to see where you stand, and how your bankruptcy court views “undue hardship.” However, plan to search high and low for attorneys willing to take on student loans in bankruptcy!
Also, be aware there will be financial costs to file a bankruptcy case, and financial consequences, such as a lowered credit score. You should also understand that a court decision to discharge student loans does not automatically happen in the bankruptcy process. You must file a separate petition and have a separate proceeding where you submit evidence to prove “undue hardship.” Having an additional hearing will also increase the attorney fees charged for your case.
How Bankruptcy may help if you cannot discharge student loans:
If you have other unsecured debts like credit cards or medical debts that make it harder to pay student loans, you may be able to file a Chapter 7 bankruptcy to discharge those debts. That may provide more income to allow you to repay your student loans and get back on track.
In a chapter 13 bankruptcy case, you submit a plan to repay your creditors over time, usually from future income. These plans allow you to get caught up on mortgages or car loans and sometimes student loans.
There may be some advantages to filing a Chapter 13 bankruptcy to address your student loans. One clear advantage is that your Chapter 13 repayment plan, not your student loan lender, will determine the amount of your student loan payments. You will make these court-determined payments while you are in the Chapter 13 plan, usually from three to five years. While you are repaying through the bankruptcy court, there will be no collection actions taken against you. This could be helpful if you are facing garnishment of your wages or losing tax refunds for nonpayment of student loans.
Keep in mind you will still owe the remainder of your student loans when your bankruptcy ends. At that point, there may be other options you can pursue with your lenders to establish affordable payments going forward to stay you on track.
Student Loan Repayment Options:
If filing bankruptcy is not for you, you may still be able to work with your lender to set up payments that fit your budget. Depending on the type of loans you borrowed, you may be eligible for income based repayment or graduated payment plans that grow as your income increases.
If you are unable to pay your student loans temporarily, you may be eligible to suspend payments through deferment or forbearance. For more information about any of these options, please call us at 888.577.2227 and ask to speak with someone on our Student Loan Team.
Again, if your student loans were borrowed from private lenders such as a major bank, options are very limited. This is the primary disadvantage of borrowing private student loans over federal loans.
Due to their inflexibility and predatory-like terms, the Department of Education and the Consumer Financial Protection Bureau recommended to Congress in August that private student loans should be treated just like unsecured consumer debt in bankruptcy. This would allow for discharge of private student loans similar to credit cards, medical debts, and personal loans. See the full report at www.consumerfinance.gov (click on “Get Assistance” tab, click on “Information for: Students”, click on “Report on Private Student Loans.”
To date little has come of that idea! You can bet that big banks will fight this tooth and nail to protect the government-backed lending niche they have found! I promise to keep you posted as new information comes to light. Still have questions? Give us a call at 888.577.2227 or visit our website at www.ConquerYourDebt.org for more information. We’ve been helping people in your community since 1987 and would love to meet with you to discuss any student loan questions you may have.
Author Barb Miller is a Certified Financial Counseling at LSS and specializes in educating clients about options surrounding bankruptcy and rebuilding after bankruptcy.