Q: Can you use bankruptcy to get rid of student loans?

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You can use bankruptcy to get rid of student loans. But a bankruptcy filing, by itself, will not eliminate your student loan debt. You need to take an additional step. You need to file an adversary proceeding asking the bankruptcy court to discharge your student loans due to undue hardship.

Click here to learn When Did Student Loans Become Nondischargeable

Why can't you file bankruptcy on student loan debt?

Despite what your bankruptcy attorney may have said, it's not that you can't file bankruptcy on student loan debt. You can. It's just that the bankruptcy discharge you get at the end of your bankruptcy case won't relieve you of the obligation to repay your student debt.

You have to file a separate lawsuit to have your student loans included in your discharge.

The separate lawsuit is called an adversary proceeding.

The adversary proceeding is not included in the cost to file your bankruptcy case no matter which type of bankruptcy you file.

You'll need to pay a separate fee to try and discharge student loans in bankruptcy.

How much will you need to pay?

There's no set cost. One bankruptcy lawyer may charge a few hundred dollars. Another may charge several thousand dollars.

Before filing for student loan bankruptcy

Here are a few things you should know before you filing bankruptcy for your student loans.

First, bankruptcy law makes it difficult to discharge student loan debt. The Bankruptcy Code says that you must prove that your student loan payments will cause you and your dependents an undue hardship. In the four decades since student loan bankruptcy laws changed, few bankruptcy filers have ever been able to provide a judge with enough proof.

Second, private student loans are often easier to discharge than federal loans. Private student loan creditors don't offer repayment plans based on your income. Federal student loans do. It's easier to prove you lack the financial resources to repay your student debt when you can't afford any of the payment plans offered.

Third, your student loan debt may be a lot higher at the end of your bankruptcy case. When you file bankruptcy, your lender will place your student loans into forbearance. Although monthly payments are no longer due, your interest will continue to grow. Depending on your interest rate and how long your bankruptcy case lasts, your balance could almost double.

Finally, bankruptcy judges use different tests to assess undue hardship.

The test your judge will use depends on where you live.

For instance, in Missouri, the bankruptcy judges here use the totality-of-the-circumstances test.

But if you live across the river in Illinois, the bankruptcy judges there will use the Brunner Test.

Fundamentally, there's not much materially different between the two tests.

They're both trying to determine if you can afford to payback your student loans and maintain a minimal standard of living.

But how they make that determination is just a little bit different.

I'll explain those differences below.

The Additional Step: Filing an Adversary Proceeding

An adversary proceeding is simply a proceeding to determine the dischargeability of a debt.

It's a lawsuit.

For our purposes here, it's a lawsuit typically filed by student loan borrowers to determine if they can discharger their student debt.

This lawsuit is necessary because unlike credit card debt, student loans aren't automatically included in the discharge order you get at the end of your case.

The Bankruptcy Code excludes student loan debt, alimony, child support, taxes, and a few other debts from that general discharge order.

Thankfully, the Code offers debtors a chance to get rid of those debts if they can win their adversary proceeding.

Click here to see a Complaint to Determine Dischargeability of Student Loan

When to file an adversary proceeding in a chapter 7

You can file the adversary proceeding before your chapter 7 bankruptcy ends. But you don't have to.

Chapter 7 bankruptcy cases are over with in a few months.

Those few months may not be enough time to get your adversary proceeding filed.

Thankfully, the bankruptcy rules say you can file the adversary after your case is closed.

To do so, you'll need to file a motion to reopen your bankruptcy case.

If granted, the motion to reopen will not restart your bankruptcy. And it will not extend the time your bankruptcy will remain on your credit report. So you don't have to worry about reopening hurting your credit score.

View Sample Motion to Reopen Bankruptcy Case

The motion to reopen simply gives you permission to file a lawsuit in your old bankruptcy case.

Click here to learn What Happens to Student Loans in Chapter 7

When to File an Adversary Proceeding: Chapter 13

There's no set time to file an adversary proceeding in a chapter 13 case.

That said, many bankruptcy judges will require you to wait until near the end of your bankruptcy proceedings before you can file an adversary.

These judges want you to wait because they don't want to waste effort.

Here's what I mean.

Chapter 13 bankruptcy cases typically lasts 36-60 months.

During that time, you have to make monthly payments to repay your secured and unsecured debt.

Many people never complete their required monthly payments under their chapter 13 plan.

As a result, some bankruptcy judges have decided to wait until your discharge is more certain (closer) before they'll let you file an adversary to discharge your student loans.

How do I prove undue hardship for student loans?

There's no one thing you can do to prove undue hardship. Congress didn't define undue hardship when it wrote the Bankruptcy Code.

There's not a mathematical test.

And, what's worst, you can't just look at other people who have been able to get a full discharge of their student loan debt in bankruptcy and think the same will happen to you because your facts are like their facts.

The evidence you need to prove undue hardship changes depending on:

  • where you live
  • your current financial situation
  • your past financial situation
  • whether your live above the poverty line
  • whether you have a permanent disability
  • whether you're married
  • whether you have kids
  • how much you owe in student loan debt
  • how long ago you borrowed your student loans
  • whether you've made payments on your loans or have just been in deferment
  • the available repayment options
  • the school you borrowed the educational loans from
  • whether you're eligible for loan forgiveness under PSLF or due to your permanent disability

Basically, what I'm saying is that there's no exhaustive list of all the facts you would need to meet the undue hardship standard.

That said, you can give yourself the best shot at proving your case by reviewing the past decisions made by the bankruptcy judge your case will be heard in front of.

While past results don't guarantee future success, reviewing what's happened before gives us a better understanding of both the proof you may need to offer and how you need to offer that proof.

Click here to learn How to Prove Undue Hardship for Student Loans in Bankruptcy

What is the Brunner Test

The Brunner Test is a test many bankruptcy judges use to analyze whether your student loans are causing you an undue hardship. It comes from a bankruptcy case from the 1980's, Brunner v. New York State Higher Education Services Corp.

In that case, the bankruptcy judge created a three-part test to determine if Marie Brunner could discharge her student loans.

The first part looks at your current income and asks can you maintain a minimal standard of living (usually measured against the federal poverty level for your family size) for you and your dependents while repaying your student loan debt?

The second part looks at your financial situation and asks is it likely to stay the same for a significant portion of the repayment period of the student loans?

The final part looks at your payment history and asks if you've made a good faith effort to repay your student loans?

You have to pass each part of the Brunner Test to win. Fail any part, and you lose. Simple as that.

The totality-of-the-circumstances-test

Some bankruptcy judges didn't like how difficult the Brunner Test was for a student loan borrower to pass. As a result, they created a different, more flexible test.

This more flexible test allows a judge to look at a borrower's additional circumstances (current income, expenses, health, etc.). Plus, the borrower can fail one part of the test and still get a partial discharge of full discharge of her student loan debt.

Private student loans bankruptcy

Earlier I said that private student loans are easier to discharge in bankruptcy than federal student loans. I supported that statement by pointing out that federal loans offer income-driven repayment plans and private loans almost never do.

There's one other reason why private loans are easier to discharge.

The Bankruptcy Code doesn't protect all student loan programs the same from discharge.

The loan must be made under a loan program and meet certain requirements to be excepted from discharge.

Under Section 523(a)(8), a private student loan is excepted from discharge if:

  1. it was made under a loan program funded by a nonprofit entity or
  2. it is a qualified education loan.

A student loan is a qualified education loan if it did not exceed your cost of attendance for your school. You can find your cost of attendance by contacting your school's bursar office. You want to check how much your school charged you versus how much you received in scholarships, grants, and federal student aid.

For example, if you check it and see that your Tuition Answer Loan was for more than the school charged you that semester, than that loan may be dischargeable without proving undue hardship.

The bottom line

You can discharge student loans in bankruptcy. It's just hard to do.

To give yourself the best shot at winning, hire a student loan bankruptcy lawyer that knows what they're doing.

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I'm a student loan lawyer that helps people like you with their federal and private student loans wherever they live.

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