Before you get your bankruptcy discharge paperwork, you have time to prevent the wage garnishment for student loans from resuming. But you have to take action quickly and do one of these three things:
Loan consolidation and rehabilitation
The Department of Education offers federal student loan borrowers two options to get out of default: consolidation and rehabilitation.
Student loan consolidation is the fastest way to bring your account current. But it comes at a cost: any outstanding interest and collection fees will be added to your loan balance. Read more about how to consolidate defaulted student loans.
Student Loan rehabilitation doesn’t result in capitalization, but it usually takes three times as long to get your loans back on track. But for a limited time, you can complete the rehabilitation program much faster. During the pandemic, the department announced that, for a limited time, borrowers who set up a new payment plan would be able to complete the loan rehabilitation program in a matter of weeks.
Related: Student Loan Rehabilitation vs Consolidation
The Education Department offers federal student loan borrowers speedy and slow ways to deal with a defaulted student loan. The fastest way is to consolidate the defaulted loans into a new loan, which capitalizes interest and collection fees. If that doesn’t sound like your cup of tea, you can slowly go through the rehabilitation program. A rehabilitation plan will work just as well in the end, but it takes three times as long.
Note: During the pandemic, the Education Department announced plans to bring nearly 8 million borrowers back into repayment and good standing through an initiative called Operation Fresh Start. The program removes the default status from borrowers’ credit reports and eliminates the need to make nine monthly payments before the accounts are brought out of default. Read more about student loan default fresh start.
Visit the Federal Student Aid website, StudentAid.gov, to start either process.
Related: What Happens to Student Loans in Chapter 7 Bankruptcy?
File student loan bankruptcy
A common myth is that getting rid of student debt in bankruptcy is impossible. Let me set the record straight: It’s possible to discharge both federal and private student loans in bankruptcy, but the process is often stressful, costly, and difficult to navigate.
Unlike credit card bills, medical bills, and other unsecured debt, student loans aren’t automatically discharged at the end of your case. To discharge student loans, you must file a separate lawsuit, known as an adversary proceeding, and convince the judge that your financial situation prevents you from maintaining a minimal standard of living while repaying your loans, i.e., your student loans are causing an undue hardship.
Related: How to Prove Undue Hardship for Student Loans
The undue hardship standard isn’t defined in the Bankruptcy Code*, so courts developed two tests that judges use to decide on student loan discharge cases. One test looks at the “totality of the circumstances” and considers things like poor medical conditions, lack of income, and lack of assets. The other test, known as the Brunner Test, asks three questions:
Do your income and expenses allow you to maintain a minimal standard of living while repaying your loans?
Is your financial situation likely to persist for a significant part of the repayment period?
Have you made a good faith effort — i.e., asked for a deferment or forbearance, enrolled in an income-driven repayment plan, etc. — to repay your loans?
Few borrowers have ever persuaded a judge to cancel their loans. Of the roughly 250 thousand people who, on average, have student loans and file bankruptcy each year, fewer than 300 discharge their student debt, according to research by Jason Iuliano, a professor at the University of Utah.
Related: Can Private Student Loans Be Discharged in Bankruptcy?
But more people will be filing cases soon. Last week, the Biden administration on Thursday released new student loan bankruptcy guidelines that will make it easier for borrowers facing financial hardship to discharge their loans in bankruptcy proceedings.
Speak about your options with your bankruptcy attorney or a student loan bankruptcy lawyer.
Related: Student Loan Bankruptcy Reform
* The law that makes student loans presumptively nondischargeable absent undue hardship is Section 523(a)(8).
Negotiate a settlement
Many private lenders and collection agencies are willing to accept a settlement for defaulted loans — even if they sued you and got a judgment.
If your paychecks were garnished to pay your loans before starting the bankruptcy process, contact the law firm that sued you to find out if they’ll settle. But you’ll have to have cash on hand: In my experience, many judgment-holders are willing to settle for around half of the current balance paid in a lump sum. They usually aren’t willing to do a deal for monthly payments.
Learn More: Can You Negotiate a Student Loan Payoff?