Student Loan Discharge in Bankruptcy
The average amount of student loan debt is $32,731 for an individual borrower. This number can be much higher if the student completed post-graduate work or had several attempts at finishing school. For many borrowers, the amount of student loan debt is crushing, leading many to wonder “Can I file bankruptcy on my student loans?”
If you are struggling with unmanageable debt, bankruptcy can be an effective tool for lifting the weight off your shoulders and helping you move on to a more secure financial future. Chapter 7 and Chapter 13 bankruptcy are legal processes that help individuals eliminate or restructure what they owe so they can get financial relief. However, it’s crucial to know that not all types of debt can be discharged through bankruptcy. Student loan debt, in particular, is a type of debt that is typically not dischargeable.
However, discharging student loan debt during bankruptcy is possible in rare circumstances. If you are considering filing for bankruptcy and are concerned about your student loans, a bankruptcy lawyer can explain your options.
At Amourgis & Associates, Attorneys at Law, our team of dedicated bankruptcy lawyers can help you evaluate your situation during a free legal consultation. We will review the details of your financial situation, explain your legal options, and develop a sound strategy to help you break free from the debt cycle. Contact us today for a free case evaluation.
Can You Even Discharge Student Loan Debt Through Bankruptcy?
Discharging student loans isn’t impossible, but it is challenging. Most people don’t even try. According to research published by the American Bankruptcy Law Journal, approximately 99.9 percent of bankruptcy filers with student loans don’t even bother trying to discharge their student loan debt. However, of the 0.1 percent of debtors who do attempt to discharge student loan debt, approximately 40 percent are successful.
Section 523(a)(8) of the U.S. Bankruptcy Code says that a debtor cannot discharge his or her student loans during bankruptcy unless repaying those loans would impose an “undue hardship” on the debtor and their dependents. Since Congress failed to provide an exact definition of the phrase “undue hardship,” the meaning of this necessary condition can vary from person to person.
Many courts use a legal assessment known as the Brunner Test to determine whether student loan repayment would impose undue hardship in bankruptcy proceedings.
The Brunner Test is designed to evaluate three key factors:
- Whether a debtor could maintain a “minimal standard of living” for themselves and their dependents if they were forced to repay their student loans in light of their current income and expenses
- Whether any additional factors exist that indicate the debtor’s financial situation will likely persist through most of the student loan repayment period
- Whether the debtor has made “good faith efforts” to repay their student loans
If you’re wondering what student loans can be discharged in bankruptcy, the “undue hardship” standard applies to both loans backed by the government and private loans.
What Is the Procedure to Discharge Your Student Loans in Bankruptcy?
Declaring bankruptcy on student loans can be challenging, especially if you try to navigate the process on your own. If you want to explore discharging your student loans through bankruptcy, it’s a good idea to hire a bankruptcy lawyer who has experience with student loan-specific cases. A knowledgeable attorney can help you assess your financial picture and determine whether you would likely be able to show your student loans would impose an undue hardship on you and your dependents.
Once you have a knowledgeable attorney in your corner, it’s time to determine which type of bankruptcy filing is appropriate for your situation:
- Chapter 7 bankruptcy – Also known as liquidation bankruptcy, Chapter 7 allows debtors to eliminate most types of debt. Chapter 7 filers typically liquidate any non-exempt property to pay off creditors and wipe the slate clean. To qualify for Chapter 7 bankruptcy, you must pass a means test to demonstrate that your income is lower than the statewide median or that you would not have enough disposable income to pay your creditors under a Chapter 13 plan.
- Chapter 13 bankruptcy – Also known as reorganization bankruptcy, Chapter 13 allows debtors to keep their assets while entering into a debt repayment plan that lasts three to five years. To qualify for Chapter 13 bankruptcy, you must have sufficient income to pay off debt that is below the applicable debt limit.
Once you file for Chapter 7 or Chapter 13 bankruptcy, you will need to file a separate action called an adversary proceeding. You must notify the court that you are filing a hardship claim on student loans, in essence, that repaying your student loans would impose an undue hardship on you and your dependents. It’s important to understand, however, that commencing this action is no guarantee that the court will grant your request to discharge your student loans.
How to Prove Undue Hardship for Student Loans
When you tell the court that repaying your student loans would cause you undue hardship, it’s up to you to provide proof to support your claim. Evidence that may help you establish undue hardship includes:
- Records of your income and expenses – Collect pay stubs, bills, and receipts for essential expenses such as rent, groceries, and utilities.
- Proof of your debt obligations – List out all of your debt obligations and compare them to your income to show that you cannot sustain a minimal standard of living while you repay your debts.
- Documentation of extenuating circumstances – If you experienced issues beyond your control that prevented you from keeping up with your payments, it’s a good idea to provide evidence of the extenuating circumstances. This can involve healthcare records that show you had a debilitating medical condition or proof of poor-quality instruction from educational institutions.
- Records of communication with lenders – Since you must be able to demonstrate that you made a good-faith effort to repay your debts, records of your communication with lenders can be critical. Keep copies of your loan statements, any payments you made, and any email or phone records from conversations with your lenders.
What Happens If Your Student Loans Aren’t Discharged?
If you can demonstrate undue hardship, the court may decide to eliminate some or all of your student loan debt. However, in some cases, the court could also deny your request and refuse to discharge your student loans. This can be frustrating, but you may have other options if your student loans aren’t discharged in bankruptcy, including:
- Student loan rehabilitation – Loan rehabilitation can help you bring your federal student loans out of default by following a prescribed repayment plan. To rehabilitate your student loans, you will usually need to make nine on-time loan payments during a 10-month period. If you have more than one, each loan must be rehabilitated separately. You can request an “alternative payment” that can be as low as $5 if you cannot afford the standard 15 percent of your disposable income payment.
- Student loan consolidation – Another option for federal student loans involves loan consolidation. When you consolidate several loans, your defaulted loans are paid off, and everything is combined into one large loan. Consolidation typically leaves debtors with a single monthly payment over a longer repayment term.
- Student loan forgiveness – If you work in education, public service, or healthcare, you can apply for forgiveness of up to 100 percent of your student loan debt after you have made a certain number of payments.
- Income-driven repayment plan – There are also income-based repayment programs available that cap your monthly student loan payments at a certain percentage of your discretionary income.
- Deferment or forbearance – With loan deferment or forbearance, you can request a temporary halt or delay in your loan payments from your lender. In deferment, you will not accumulate any interest on your loans. In forbearance, your loan balance may accrue interest.
How an Ohio Bankruptcy Lawyer Can Help You
Your lawyer might be able to help you prove undue hardship and seek the elimination or reduction of your student loan debt by:
- Considering your options and determining whether bankruptcy is best for you
- Determining whether Chapter 7 or Chapter 13 bankruptcy is more appropriate
- Reviewing your financial situation to evaluate whether you may qualify for an undue hardship discharge
- Valuing assets, maintaining records, and preparing paperwork on your behalf
- Communicating and negotiating with creditors on your behalf
- Representing and advising you during bankruptcy court hearings
Contact Amourgis & Associates, Attorneys at Law Today
The award-winning team at Amourgis & Associates, Attorneys at Law, is dedicated to helping those who are struggling with overwhelming debt. We are dedicated to helping you find a clear path to a better and more financially secure future. We are committed to providing a thorough evaluation of your financial situation and will work to find a solution that meets your needs and goals.
Call us today, fill out an online contact form, or chat with us live for a confidential consultation with one of our Ohio bankruptcy lawyers today. We can evaluate your options for bankruptcy and student loans.