Bankruptcy filers can put student loans in Chapter 7. But putting your student loans on your bankruptcy petition won't automatically get rid of your student loans. The bankruptcy court treats your student loans differently from your other unsecured creditors (car loans, credit card debt, medical bills, etc.).
When you finish your chapter 7 finishes, the bankruptcy court will give you a discharge order.
The discharge order will clear most of your unsecured debt.
But it won't get rid of child support, alimony, most tax debt, and federal and private student loans.
To get rid of your student loan debt, you'll need to get a student loan bankruptcy discharge.
So if you're wondering, "Weren't my student loans discharged in chapter 7?"
The answer is no, your student loans weren't discharged in your chapter 7. You'll need to file an adversary proceeding (lawsuit) to get rid of them.
Keep reading. I'll explain below how you can do that.
What happens to student loans in chapter 7?
When debtors file chapter 7, two things happen:
- Any wage garnishment for student loans will stop.
- Your loans will go into an administrative forbearance/deferment.
Both the garnishment and forbearance will stay in place until your bankruptcy case ends.
Once it ends, you'll still owe your student loans. The only way to get rid of them under the Bankruptcy Code is to file an adversary proceeding to discharge student loan debt.
Click here to learn How to File an Adversary Proceeding for Student Loans
The adversary for student loan discharge is not included in the fee your bankruptcy attorney charged.
The AP is a separate bankruptcy proceeding. It's not included in the legal fees and court fees you paid to file chapter 7.
To get rid of your student loan debt, you'll have to pay your attorney a second fee to file the adversary. Of course, that may be hard to do if you're living near the poverty level. You simply don't have the financial resources to hire a lawyer. In that case, contact a legal aid agency near you.
What happens to private student loans in chapter 7?
Your private student loans will go into deferment/forbearance when you file bankruptcy.
The interest will keep growing throughout your case.
When your bankruptcy case ends, you'll still have to pay back your private student loans. The discharge order you got did not automatically get rid of your private student loans.
As is true of your federal student loans, you'll need to file an adversary proceeding to get rid of your student loan debt.
Thankfully, private student loans are usually easier to get rid of in bankruptcy.
They're easier to get rid of because private lenders don't usually offer their loan borrowers income-based repayment plans or loan forgiveness programs.
The federal government offers its student loan borrowers both.
Those two things make it hard to say you can't afford a minimal standard of living.
Click here to read How to Discharge Private Student Loans in Bankruptcy
How to discharge student loans in chapter 7?
There are two steps to discharge student loans in chapter 7:
- File a chapter 7 bankruptcy case.
- Open an adversary proceeding to discharge your student loans as an undue hardship.
To meet the undue hardship standard, you likely will have to pass the Brunner test or the totality-of-the-circumstances test.
The different tests comes from old bankruptcy cases.
The Brunner Test comes from a 1980s bankruptcy case, Brunner v. New York State Higher Education. The totality of the circumstances test comes from an Eight Circuit case around that same time.
The Brunner test has three prongs or three questions:
- Based on your current income, are you unable to maintain a minimal standard of living while repaying your student debt?
- Do additional circumstances exist that show your current financial situation is likely to persist throughout a significant portion of the repayment period of the student loans?
- Did you make a good faith effort to make your monthly payments?
If the answer is yes to all three questions, you've met the undue hardship standard. If any answer is no, you lose.
Click here to learn How to Pass the Brunner Test to Prove Undue Hardship.
Regardless of which test is used, the question the bankruptcy court is trying to answer is this:
Based on your current income and expenses, can you make your student loan payments throughout the repayment period while maintaining a minimal standard of living?
If the answer is no, the court will grant you an undue hardship discharge.
Depending on where you live, the undue hardship discharge will either be a partial discharge or a full discharge.
Click here to download sample complaint Adversary Proceeding Student Loans
Why was my student loan account closed after filing a chapter 7?
When your credit report shows that your student loan account was closed after filing for bankruptcy, chances are it was transferred to another company.
Filing bankruptcy may trigger the insurance (guaranty) on your student loan. When that happens, your loan balance is paid by the guaranty entity, and now you owe that company for your loan.
Long story short: just because your student loan account was closed after filing chapter 7 doesn't mean you no longer owe the debt. Unless you file the AP and get an order from the court saying your student loan debt was discharged, you still have to pay back those loans.
(And that's true even if your loans no longer show on your credit history.)
Contact your loan servicer and ask them about the repayment plans you qualify for.
Can I get a student loan after filing chapter 7?
You can still get federal student loans after filing chapter 7 bankruptcy. You're eligible for federal student aid, including federal loans, unless you're in default. Eligibility for federal student loans is not based on credit scores.
That said, the federal government will do a credit check to see if you have an adverse credit history. A recent bankruptcy is considered an adverse event. Graduate students with an adverse event like bankruptcy, may need to get a cosigner to borrower Grad Plus Loans.
Private loans, on the other hand, are based on credit scores.
As a result, you may find it hard to get a private student loan after filing bankruptcy.
Discharging student loans in bankruptcy is impossible. But to do that, you first have to file for bankruptcy and then file an adversary proceeding asking for a student loan discharge due to hardship.
Because filing bankruptcy on student loans is a separate service from filing your case, be prepared to pay your bankruptcy lawyer a separate fee.