Filing for bankruptcy for student loans: What you need to know

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Filing for bankruptcy is never ideal, but there are situations where having debt discharged is the only way forward. This is true for medical debt, credit card bills and even student loans, although the type of bankruptcy you should pursue (Chapter 7 or Chapter 13) depends on many factors, such as your ability to work in any capacity.

Many people believe that you cannot discharge student loans in bankruptcy, but this isn’t always the case. There are processes you can follow to attempt to have your student loans discharged, but you will have to prove that you are facing something called “undue hardship” to qualify.

How to file for bankruptcy with student loans

The first step to filing for bankruptcy with student loans is locating a lawyer who has expertise in this area. Working with knowledgeable legal counsel can help you navigate the process, although you should know that bankruptcy can cost thousands of dollars and that being able to afford an attorney may mean that you’re ineligible for discharge based on undue hardship.

Some student lawyers may offer a free consultation, however, where they can go over your options and let you know if bankruptcy is a viable option for you.

You then have the option of declaring Chapter 7 or Chapter 13 bankruptcy, but you must be able to “demonstrate that repayment would impose undue hardship on you and your dependents,” according to the U.S. Department of Education.

Proving undue hardship will take place in “an adversary proceeding in bankruptcy court,” it notes. Further, your creditors or representatives of your creditors may be at the proceeding in order to challenge your claim.

Which type of bankruptcy should you consider? That depends on your ability to work and receive an income, as well as what you hope to achieve. There are two main types of bankruptcy for consumers:

  • Chapter 13 bankruptcy allows you to keep your property, but you must repay most of your debts over three to five years. This is why Chapter 13 bankruptcy is often called “reorganization.”
  • Chapter 7 bankruptcy paves the way for a liquidation of your assets, which will be sold to repay some of the money you owe. With Chapter 7 bankruptcy, your debts will be wiped away completely.

After you file for Chapter 7 or Chapter 13 bankruptcy, you or a bankruptcy attorney will need to file a complaint to start the sequence of events that leads to the adversary proceeding. At that point, you may receive a discharge of all of your student loans, a discharge of part of your loans or no discharge at all.

What is undue hardship?

While undue hardship can look different for each person, this term is used to describe a situation where it would be practically impossible for you to repay your student loans.

For example, undue hardship would describe any situation where someone cannot pay their student loans and pay for a roof over their head or put food for the table. If you racked up significant student loan debt but became incapacited and unable to work after a car wreck, for example, this is one situation that could qualify.

Undue hardship also needs to be likely to “continue for a significant portion of the loan repayment period,” notes the U.S. Department of Education. In other words, a medical student who is drowning in debt cannot file bankruptcy on their loans, have them discharged then go on to earn a significant income a few years later.

You also have to make a good faith effort to repay your loan before moving forward with bankruptcy. If you don’t, it’s less likely that you’ll be successful in bankruptcy court.

Can student loans be discharged under Chapter 7?

You may be able to have your student loans discharged under Chapter 7 bankruptcy, but the terms under which this could occur can only be decided in bankruptcy court. Chapter 7 bankruptcy is more likely to work in cases of extreme undue hardship where it would be impossible for the applicant to repay their loans under any repayment plan.

What happens if the bankruptcy court doesn’t discharge my loans?

Once you move forward with Chapter 7 or Chapter 13 bankruptcy, three possible scenarios might play out. You could see all of your student loans and other debts wiped away completely, your loan could be partially discharged or you could have to repay your loan under better terms, such as with a lower interest rate or monthly payment. You may also fail at having the terms of your loans changed at all during bankruptcy proceedings, which is a risk you’ll need to take.

If the courts do not find your claim of undue hardship adequate to qualify for bankruptcy, you may have no choice but to carry on in an effort to repay your loans. Some of the options you can consider at this point include:

  • Switch your payment plan on federal loans: Note that you may be able to tweak your repayment plan and repay your student loans over up to 30 years, which could drastically lower your monthly payment.
  • Apply for income-driven repayment plans: These plans let you pay a percentage of your discretionary income for 20 to 25 years before ultimately forgiving your remaining loan balances. You also pay a percentage of your discretionary income each month, so your payments could be much lower than they are now.
  • Look for other loan forgiveness programs. Public Service Loan Forgiveness (PSLF) is available for individuals who are willing to work in qualifying public service positions and make payments on an income-driven plan for 10 years, but there are other types of loan forgiveness plans you can explore.
  • Ask for temporary deferment or forbearance. If you need temporary relief from your federal student loans, look into deferment and forbearance, both of which let you pause payments on your loans for a limited period of time. Just remember that interest may continue accruing during forbearance, which could make your problem worse.
  • Refinance your student loans with a private lender. This option won’t work for everyone, but you could refinance your student loans with a private lender that might offer a lower interest rate or a monthly payment that you can afford. Just remember that you lose federal benefits like deferment, forbearance and access to income-driven repayment plans when you refinance federal loans with a private company.

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