Q: Does filing bankruptcy clear student loan debt?

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Stanley tate

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Filing chapter 7 or chapter 13 bankruptcy does not automatically clear student loan debt. To get rid of your student loans in bankruptcy, you have to file an adversary proceeding. The adversary proceeding is a lawsuit you file asking the bankruptcy court to discharge your student loans as an undue hardship to you and your dependents. 

Typically, you get better results trying to discharge private student loans than you do federal student loans.

Why is that? 

Federal student loans offer monthly payments based on your income and loan forgiveness programs.

It’s hard to argue you can’t afford a $0 monthly student loan payment.

Private student loans don’t offer those types of repayment plans or loan forgiveness options.

How to file for student loan bankruptcy

Filing bankruptcy for your student loans is no different than filing bankruptcy for your credit card debt, medical bills, and other types of debt.

First, you file a bankruptcy case. Most student loan borrowers file chapter 7 or chapter 13. 

Some borrowers that owe more than $400 thousand in student loan debt and earn a higher income may not qualify for either type of bankruptcy case. In their case, they may need to file a chapter 11 bankruptcy.

Second, you file an adversary proceeding asking the court to grant you to discharge your outstanding student loan debt.

When do you file?

If you filed chapter 7, you can file the adversary right after your bankruptcy attorney files your case. You can also wait until the bankruptcy proceedings are over and file then. And sometimes, you can file the adversary a few years after your bankruptcy case has closed. 

If you filed a chapter 13, you may be able to file an adversary soon after you filed your case. But in many bankruptcy courts, you have to wait until your chapter 13 case is near the end before you file.

How to prove undue hardship for student loans

Your prove undue hardship for student loans by showing a bankruptcy judge you cannot maintain a minimal standard of living for yourself and your dependents while repaying your student debt.

How you prove that depends on where you filed your bankruptcy case.

You see, the U.S. Bankruptcy Code doesn’t define undue hardship. As a result, over the years, bankruptcy courts have developed different tests to determine whether a debtor has an undue hardship.

The two most popular tests are the Brunner Test and the totality-of-the-circumstances test.

The Brunner Test comes from a 1980’s bankruptcy case, Brunner v New York State Higher Education. The totality-of-the-circumstances test comes from the 8th Circuit. 

Both tests are trying to do the same things - determine if you can be granted a student loan bankruptcy discharge - they just go about a little bit differently.

The Brunner Test

The Brunner Test tries to determine undue hardship by asking three questions::

  1. Based on your current income, can you maintain a minimal standard of living for you and your dependents while repaying your student loan debt?
  2. Is your financial situation likely to stay the same for a significant portion of the repayment period of the student loans?
  3. Have you made a good faith effort to repay your student loans?

The first question, about maintaining a minimal standard of living, is really hard to get past with federal student loans. 

How can you say you can’t maintain a minimal standard of living when the U.S. Department of Education offers you student loan repayment options based on your income? 

This is one reason why private loans are sometimes to easier to discharge or, at least, obtain a partial discharge.

Click here to read How to Prove Undue Hardship Using the Brunner Test?

The Totality of the Circumstances Test

The totality-of-the-circumstances test is similar to the Brunner Test. 

But some bankruptcy attorneys, judges, and legal scholars have argued it’s easier to pass.

The reason?

It’s more forgiving. 

Under the totality-of-the-circumstances-test, a court may consider:

  1. your past, present, and reasonably reliable future financial resources
  2. a calculation of you and your dependent’s reasonable necessary living expenses
  3. any other relevant facts and circumstances surrounding each particular bankruptcy case.

Should you file student loan bankruptcy?

My answer when people ask me should they file student loan bankruptcy is, “it depends.”

I rarely suggest filing bankruptcy on your student loans if student loans are your only debt. It’s simply too hard to get a full discharge. Plus, there are usually other options to deal with your student loans out of bankruptcy.

But if you have a bunch of other debts you’re getting rid of regardless if you get rid of your student loans, then, yeah, it may make sense to try and get rid of your student loans.

What do you have to lose at that point?

Money? Time?

The potential payoff of getting from under your student loan debt may make it worth your while to take that chance.

What happens if your student loans aren’t discharged?

If your student loans aren’t discharged in your bankruptcy, then the loans will go into repayment.

If your student loans are with the federal government, you’ll be able to enroll in an income-driven repayment plan (unless you’re in default).

And if your loans are private loans, you’ll want to contact your lender/loan servicer to see what repayment options they’re offering.

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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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