Sometimes your only option to deal with your student loans is to file bankruptcy. While many people say you can't discharge student loans in bankruptcy, they're wrong. You can file bankruptcy to get rid of your education debt. It's just not as easy to get rid of your student loans as it is your medical debt, credit card bills, etc.
No matter the type of bankruptcy you file (chapter 7 or chapter 13), there are processes you can follow to try have your student loans discharged. A big part of that process is proving you have an undue hardship.
What is undue hardship on student loans?
Undue hardship is a term used to describe a situation where you would experience excessive suffering if you were forced to repay your student loans. Ordinary suffering or hardship is insufficient.
Undue hardship can look different from person to person. There is no universal definition. The Bankruptcy Code doesn't define it. As a result, bankruptcy judges have tried to define undue hardship for themselves using different tests.
Most bankruptcy judges use the Brunner Test. Bankruptcy judges in Arkansas, Iowa, Minnesota, Missouri, North Dakota, and South Dakota use the totality of the circumstances test.
This undue hardship test is based on a 1980s bankruptcy case from the Second Circuit, Marie Brunner v. New York State Higher Education Services Corp.
The Brunner test asks three questions: (1) whether you have a current inability to repay your student loans; (2) whether that inability will persist for the foreseeable future; and (3) whether you made a good faith effort to repay your educational debt.
Totality of The Circumstances Test
Like the Brunner Test, this test looks at your past, present, and future financial resources. But unlike the Brunner Test, this test allows bankruptcy judges to look at the totality of circumstances.
For example, they can look to see if anything prevented you from making a good faith effort to repay your student loans, or whether you've been prevented from working in your field of study for reasons out of your control.
The flexibility of the totality of the circumstances test has led some legal scholars to argue that the burden is easier for debtors to get full discharges of their student loans.
Undue Hardship: Checklist Before Filing
In my years of helping student loan borrowers try and get a discharge of student loan debt using the bankruptcy process, I've noticed a few common factors that make for a stronger case.
Here are some things I look for:
- Are the loans federal student loans or private student loans? Federal loans are harder to discharge than a private student loan because they offer income-driven repayment plans. Private lenders typically don't offer the same type of plans. This is why filing bankruptcy on private student loans is often easier.
- How long is the repayment period? Your inability to repay your loans must last for a significant portion of the repayment period of the student loans. Federal Consolidation Loans are paid over 25 years. Private student loans typically have much shorter repayment periods (10 years.)
- Are you eligible for an income-driven repayment plan? $0-low monthly payments make passing the test hard.
- How much student debt do you owe? The more student loan debt you have, often times, the better.
- How much have you earned annually since you started working? You have the burden of proof to show your past income has left you unable to pay your student loans. I look at my client's last 5 years of tax returns to see how much they've earned on averaged. I also have them pull their Non-Certified Detailed Earnings Record from the Social Security Administration. That shows their earnings since they started working.
- What's your current monthly income? It's hard to argue you should get a student loan discharge when your current income is $8 thousand/month. While you don't need to earn near the poverty level, it's more helpful to have a lower income than a higher income.
- What are your current monthly expenses? One of the first thing the bankruptcy court will look at is whether you can afford to repay your student loan debt while maintaining a minimal standard of living. Look at your monthly expenses for the past 12 months. What cuts can you make?
- Are your financial difficulties temporary or permanent? The longer-lasting your financial hardship throughout the loan repayment period, the better.
- Do you work full-time or part-time? Full-time work is better. Full-time work plus part-time work is fantastic.
- Are you receiving Social Security Benefits? A permanent disability may allow you to get a disability discharge of your federal loans. It also can help you get a full or partial discharge of your private student loan debt.
- Are you married? Your partner's income will affect your ability to discharge your student loans.
- Do you have children? Younger children require support (financial and time) for a significant portion of the repayment period. Your children may make it easier to prove that your financial inability will persist into the future.
- Are you or your dependents disabled? Disabilities that negatively affect your ability to work increase your chances of getting a discharge.
- How many student loan payments have you made? The more payments you've made before filing bankruptcy, the more good faith you've shown.
- Have you used deferments/forbearances? Using deferments and forbearances shows a good faith effort to repay your debts.
- Are you upside down with your mortgage? The less equity you have to borrow against to pay your loans, the better.
- Do you have savings/retirement funds? The less money you've put towards retirement, the better.
Lastly, are there any other additional circumstances that make it incredibly difficult for you to pay back your student loans? If so, how long will that state of affairs last?
Process for discharging student loan debt
- Meet with a bankruptcy attorney.
- File a chapter 7 bankruptcy or a chapter 13 bankruptcy case.
- Get a bankruptcy discharge.
- File an adversary proceeding.
Basically, an adversary proceeding is a lawsuit that a debtor or creditor can file to determine whether a debt can be discharged.
A student loan adversary proceeding is a lawsuit usually filed by a debtor asking the bankruptcy court to discharge their student loans because they're causing the debtor and the debtor's dependents an undue hardship.
You can read this guide to How to File Bankruptcy on Student Loans to better understand the process.
Think you can prove undue hardship? Let's talk
Trying to meet the burden to file student loan bankruptcy is overwhelming. For years, I've helped people just like you get rid of their federal and private student loans in bankruptcy.
Schedule a free 10-minute call with me today. We’ll work together to determine the best strategy to deal with your student loans both inside of and outside of bankruptcy.