Q: How does bankruptcy affect Parent Plus Loans?

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Parent Plus Loans are Federal Student Loans

Parent Plus Loans are a type of federal student loan offered by the U.S. Department of Education.

The purpose of Parent Plus Loans is to allow parents to borrow student loan debt to pay for their dependent's education.

There are 4 types of loans made under the Parent Plus Loan Program:

  • ​Federal Family Education Loan Parent Plus Loan
  • FFEL Consolidation Loan of a Parent Plus Loan
  • Direct Loan Parent Plus Loan
  • Direct Consolidation Loan of a Parent Plus Loan

So you know, a parent cannot transfer a Parent Plus Loan to their child or another parent.

Likewise, neither your child nor the other parent can consolidate the loan into their debt.

Finally, neither your child nor the other parent can make themselves legally responsible for making the monthly payments. The loan will remain your loan.

The only way a Parent Plus Loan can be transferred is for the child or parent to pay off the loan with a loan of their own. So, for example, if your child borrowed a personal loan from a private lender equal to the amount you owe, then the child would use their loan to pay off your loan.

Can you discharge Parent Plus Loans in Bankruptcy?

You can discharge a Parent Plus Loan in bankruptcy. But doing so is a two-step process.

First, you have to file a bankruptcy case. Most Parent Plus Loan borrowers will file either a Chapter 7 bankruptcy or chapter 13 bankruptcy case.

Once you file bankruptcy, your loan servicer will place your loan into a bankruptcy deferment/forbearance. During this period, you can make your monthly payments if you'd like, or you can wait until your bankruptcy case is over.

Be careful if you're in a chapter 13 bankruptcy. If you wait until the end of your case, your loan balance can grow substantially. The reason why it will grow is that interest does not stop accruing during bankruptcy.

Second, discharge your Parent Plus Loan, you'll need to file an adversary proceeding. Again, by itself, bankruptcy does not clear student loan debt. You have to file the adversary proceeding.

An adversary proceeding is a lawsuit inside of your bankruptcy case. You have to file this lawsuit because student loans are not automatically discharged when you get a discharge of your other consumer debts.

Heads up. The adversary proceeding (A.P.) is usually not included in the fee you paid your bankruptcy attorney. To file the A.P., you'll either need to re-hire your bankruptcy attorney (or a student loan attorney like myself) or try and do it yourself.

How to discharge a Parent Plus Loan in Bankruptcy

Here's how to discharge a Parent Plus Loan in Bankruptcy:

  1. File a chapter 7 bankruptcy or chapter 13 bankruptcy case
  2. File an adversary proceeding asking the court to determine your student loans are dischargeable under 11 U.S.C. 523(a)(8)
  3. Depending on which test your bankruptcy court uses, pass either the Brunner Test or the totality-of-the-circumstances test

I've written a whole article about student loan bankruptcy and the Brunner Test elsewhere, so I won't go into much detail here.

I will, however, provide a general overview in the next section.

Undue Hardship for Student Loan Discharge

Basically, to discharge both federal student loans and private student loans in bankruptcy, you have to prove that making payments under a loan repayment program would cause you and your dependents an undue hardship.

The Bankruptcy Code (that is to say, the bankruptcy rules) doesn't define undue hardship.

In the absence of a definition, bankruptcy judges use different tests to analyze whether repaying your student loans causes you an ordinary hardship or an undue hardship.

The most popular test used is the Brunner Test.

The Brunner Test asks 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 student loans' repayment period?
  3. Have you made a good faith effort to repay your student loans?

Click here to learn more about How to File Bankruptcy on Student Loan Debt and Get a Discharge

How does bankruptcy affect Parent PLUS loan eligibility?

Filing bankruptcy does not make you ineligible for federal student aid (FAFSA).

You remain eligible for federal financial aid no matter if you file a chapter 7 or 13 bankruptcy.

The one catch is that if you're in a chapter 13, you may have to get the bankruptcy court's permission before you borrow a new Parent Plus Loan.

Although I just said you remain eligible for federal financial aid after filing bankruptcy, there is one catch:

You may no longer be considered creditworthy to borrow Plus Loans.

​Unlike other federal student loans, the federal government conducts credit checks before issuing a new Plus Loan.

The focus of the credit check isn't your credit score. Instead, it's to check your credit report to see if you have an adverse credit history.

If you have an adverse credit history, then, according to the Higher Education Act, you're not eligible to borrow new Plus Loans.

An adverse credit history includes late payments and receiving a bankruptcy discharge.

All is not lost if you're denied a new Plus Loan because of an adverse credit history. You can still appeal.

Repayment Plan Options for Parent Plus Loans

​Absent consolidation, there are no income-driven repayment options for Parent Plus Loans.

You're stuck having to pay the loans off over 10 years.

Your student loan payments may be much more than you earn each month, depending on your financial situation. And that's especially true if you have student loan debt after retirement.

If you need a lower monthly payment for your Parent Plus Loans, you may need to consolidate your Parent Loan into a Direct Consolidation Loan.

Once you do that, your new loan will be eligible for the Income-Contingent Repayment Plan.

The I.C.R. payment plan gives you a monthly payment based on your discretionary income.

Discretionary income for student loans is a combination of your adjusted gross income and family size.

You can apply for the consolidation loan for free at student aid.gov.

Loan Forgiveness Options for Parent Plus Loans

​There are three main loan forgiveness options for Parent Plus Loans:

  1. ​Public Service Loan Forgiveness for employees of nonprofits and the federal government
  2. Loan forgiveness under the Income-Contingent Repayment Plan and
  3. Loan forgiveness due to Total and Permanent Disability

Click here to learn How to Get Loan Forgiveness for Parent Plus Loans

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