There are a lot of myths and misconceptions about whether you can discharge student loans in bankruptcy. Many people believe that you cannot discharge student loans in bankruptcy. Further, many bankruptcy attorneys will not even attempt to have discharge student loans in bankruptcy. This is where our experienced student loan lawyers come in.
The truth is you can discharge student loans in bankruptcy. The process can be difficult, but the possibility of a discharge should not be ignored any longer. Only 0.1% of people with student loans in bankruptcy even ask to have their student loans discharged. Of those that do, nearly 40% are successful, according to a 2011 study.
The myth that you cannot discharge student loans in bankruptcy has continued to grow over the years. According to one bankruptcy judge, the “undue hardship standard” has become a quasi-standard of mythic proportions so much so that most people (bankruptcy professionals as well as lay individuals) believe it impossible to discharge student loans in bankruptcy. Thankfully, the judge went on to say that she “will not participate in perpetuating these myths.”
Can you discharge student loans in bankruptcy?
Yes! While not everyone is entitled to discharge student loans in bankruptcy, it is not impossible as many people would have you believe.
To determine whether you can discharge student loans in bankruptcy, you should start by identifying the type of loan that you have. Generally, you should know whether you have a federal student loan or a private student loan. While it is possible to discharge federal student loans in bankruptcy, it is more difficult to discharge federal student loans in bankruptcy than to discharge private student loans in bankruptcy.
Why? In order to discharge a federal student loan in bankruptcy, you must establish an “undue hardship”. This can be difficult to prove for many people. On the other hand, there are other ways to show that a private student loan can be discharged in bankruptcy (in addition to “undue hardship”). We’ll discuss this in more detail below.
What is the first step in discharging student loan debt in bankruptcy?
To start the process of discharging your student loans through bankruptcy, you must first file for bankruptcy. The good news for you is that our bankruptcy lawyers have years of experience in bankruptcy and can skillfully guide you through the process of choosing the right path for you, which will generally be either a Chapter 7 or Chapter 13 bankruptcy. You can discharge student loans in bankruptcy through any bankruptcy chapter so we will advise you on which chapter is best for you.
It is also important to note that if you have already filed and completed a bankruptcy, you may not have to file another bankruptcy. In these circumstances, our student loan lawyers can file a motion to re-open your bankruptcy and then go through the steps to challenge your student debt. Don’t worry though, this doesn’t have any effect on your credit.
How do I challenge my student loan debt in bankruptcy?
Once you have filed for bankruptcy or we have re-opened a prior bankruptcy, the next step to discharge student loans in bankruptcy is to file a separate action within the bankruptcy case, known as an adversary proceeding. This adversary proceeding is similar to a lawsuit in that it will start with the filing of a complaint and can proceed through a trial and appeal, if necessary.
This process, within a bankruptcy, can be very difficult and our highly specialized student loan lawyers are some of the few attorneys that understand how to best proceed with challenging student debt through an adversary proceeding.
How long will the adversary proceeding take for federal student loans?
As stated above, the adversary proceeding works much like a lawsuit in that it starts with a complaint and continues through a trial and appeal. How long this takes may depend on whether you have a federal student loan or a private student loan.
When dealing with federal student loans, you can expect the US government to fight the case to the end and there will generally be no settlement of any value to you offered by the federal government. As such, the adversary proceeding will almost always require proceeding through the summary judgment phase at the very least. This can take up to one year to complete. If the case requires a trial or goes through an appeal, you can expect this timeline to increase.
On the other hand, the odds of settling your case prior to trial are much higher with private student loans. These lenders tend to recognize that they may lose the trial. As a result, they may be more willing to negotiate than the government would be.
Every case is different and a student loan lawyer can help give you a better idea of the timeline specific to your situation.
Can the court discharge a portion of my student loan debt?
Yes. The court is not forced to choose between all or nothing in a student loan discharge case. The court has the option to discharge a portion of your student loans if they choose to.
When looking to discharge student loans in bankruptcy, the possibility of a partial discharge can be good or bad, depending on your situation. Sometimes, a partial discharge allows us to drastically reduce your student loan payments which can change your life.
What is the standard for discharging student debt in bankruptcy?
Generally, the standard to discharge student loans in bankruptcy is a showing that the payment of the debt will impose an undue hardship on you and your dependents. Generally, most courts will use the “Brunner test” to determine if there is an undue hardship imposed on you and your dependents.
The Brunner test has three main factors that courts will focus on:
- Whether you can maintain a minimal standard of living for yourself and your dependents if you must repay the student loan;
- Whether you and your dependents have circumstances, above and beyond normal circumstances, that will extend through at least a significant portion of the loan; and
- Whether you have made good faith efforts toward repaying your student loan(s).
We will go into further detail about each of these factors below.
Minimal standard of living
The first factor that will be taken into consideration is your ability to maintain a minimal standard of living for yourself and your dependents given your student loan debt and monthly payments. This does not mean that only people living in poverty with no possessions will satisfy this requirement. Courts will look at your monthly income and your monthly expenses including the amount necessary to repay your student debt. The purpose of this is to determine the reasonableness of your budget as a whole.
A minimal standard of living includes, among other things, furnished and maintained shelter, basic utilities, food, clothing, vehicles, insurance, and even the ability to pay for a source of recreation. Again, the court will look at the reasonableness of each of these expenses.
This prong can be tough to meet for individuals with federal student loans due to the fact that there are income-driven repayment plans available, which can greatly lower monthly payments. If your monthly student loan payment is $0 or something close to that, it is hard to argue that such a small amount is preventing you from sustaining a minimal standard of living. However, it is possible for an individual to have unaffordable payments even while on an income-driven repayment.
Courts may also consider the individual’s spouse’s income in addition to the individual’s income when determining the minimal standard of living even if the individual’s spouse has not declared bankruptcy as a co-debtor.
When you are trying to discharge student loans in bankruptcy, it is critical to show you cannot maintain a minimal standard of living.
Above and beyond normal circumstances
The second factor that courts will take into account is whether you have circumstances that are above and beyond normal circumstances and whether these circumstances will extend throughout a significant portion of the term of the loan. This can be tough to show in some cases because it can be subjective and speculative.
Some of the potential circumstances that courts have seen as above and beyond normal circumstances include serious mental or physical disability of the individual or the individual’s dependents which prevents employment and circumstances relating to an individual’s employment opportunities including poor quality of education, maximized income potential in the chosen education field, and limited remaining years in the individual’s work life.
As stated above, these circumstances must extend throughout a significant portion of the loan. They can not simply be a temporary situation that is likely to change in the near future. Due to the subjective nature of this factor, you will require the submission of evidence to prove your circumstances.
When you are trying to discharge student loans in bankruptcy, it is critical to show your circumstances are “above and beyond” normal circumstances. Our experienced student loan lawyers are skilled in putting together the best argument and supporting evidence, including expert reports, etc., to show that your circumstances are above and beyond normal circumstances.
Good faith efforts to repay
The third factor that courts look at is whether you have made good faith efforts toward repaying your student debt. This is a measure of your efforts to obtain employment, maximize income, and minimize expenses. Some considerations that courts have taken into account include making payments when the debtor could, seeking deferment when necessary and negotiating an income-driven repayment plan. If you would qualify for an income-driven repayment plan, but you fail to sign up, this will be a negative factor for your case.
It is also important to note that the court will look to see if the student debt is a significant portion of your overall debt such that if you are able to discharge other debts in bankruptcy, you will free up money that can be used to pay off your student loans.
If you have consistently put in the effort to make payments and avoid missing payments at all costs, this can generally be an easier prong to prove. Nevertheless, when you are trying to discharge student loans in bankruptcy, it is critical to show you have made good faith efforts to repay.
Is your private student loan a qualified educational loan?
As stated above, if you have a private student loan, you may have other arguments available in addition to “undue hardship”. You can discharge private student loans in bankruptcy in a number of other ways.
There is a presumption that student loans in bankruptcy are non-dischargeable if they meet the statutory requirements. For private student loans, this requires the loan to be a qualified educational loan.
To be a qualified education loan, a private student loan must be:
- For an eligible student;
- For attendance at an eligible education institution; and
- Solely used for qualified higher education expenses.
We will go into further detail about each of these requirements below, but if you can show that the loan is not a qualified educational loan, you can discharge your student loan in bankruptcy.
Who is an eligible student?
For a private student loan to meet the qualified educational loan requirement, it must be taken out to pay expenses for the education furnished during a period in which the recipient was an eligible student. An eligible student is a U.S. citizen or eligible non-citizen who is enrolled at least half-time in an eligible degree or certificate program. The term is also defined as a taxpayer.
Additionally, the educational expenses must be paid or incurred within a reasonable period of time before or after the indebtedness is incurred. The educational expenses must also be incurred on behalf of the debtor, the debtor’s spouse or a dependent of the debtor.
If you are not an “eligible student”, you can discharge your student loans in bankruptcy.
What is an eligible educational institution?
To be protected as a qualified educational loan, the private student loan must be for attendance at an eligible educational institution. These eligible educational institutions are colleges and universities that are eligible to participate in a Title IV program which governs federal financial assistance programs.
It is important to look out for unaccredited institutions, especially unaccredited for-profit schools, as well as trade schools and loans made for bar exams or medical residencies.
If your student loans were not for attendance at an “eligible educational institution”, you can discharge your student loans in bankruptcy.
What are qualified educational expenses?
Qualified educational loans are required to be incurred solely to pay for qualified higher education expenses. These expenses are defined as the cost of attendance for a student and generally include tuition and fees that are determined by the institution, an allowance for books and supplies, and an allowance for room and board as determined by the institution. In general, the cost of attendance is set by the institution.
It is important to note that if the indebtedness is incurred for expenses other than qualified higher education expenses, the private loan may be considered a mixed-use loan and not subject to the protections of the Bankruptcy Code.
If your loan was not for “qualified educational expenses”, you can discharge your student loans in bankruptcy.
Can you discharge student loans without bankruptcy?
Yes! In some cases, we are able to discharge student loans without filing for bankruptcy. In the right case, you may be a candidate for student loan defense (sometimes called student loan defense to repayment). In most cases, this is only an option for private loans. If you have federal loans, you may want to consider student loan forgiveness or administrative discharge of student loans.
There are some cases in which bankruptcy does not make sense for an individual. For instance, someone with very little consumer debt and with less than $50,000 in private student loan debt may be a good candidate for a settlement offer without filing for bankruptcy.
In many cases, we are able to contact your lender and offer to pay less than the full amount of your debt. In this case, we would lay out the arguments to show that we could discharge your student loans in bankruptcy. The thinking is that a private lender will want to work with you on reaching a settlement instead of fighting against a possible adversary proceeding once they see that your loan is likely to be discharged in bankruptcy.
Our experienced student loan lawyers have extensive experience drafting these demand letters and negotiating with private lenders to settle private student loan debt for a fraction of the total amount due.
Which private lenders can we help with?
Our experienced student loan lawyers have assisted borrowers with private student loans from every private student loan lender. Some of the assistance we have provided those struggling with student debt include:
- Bankruptcy for SoFi student loans
- Bankruptcy for Navient student loans
- Bankruptcy for Ascent student loans
- Bankruptcy for Discover student loans
- Bankruptcy for Sallie Mae student loans
- Bankruptcy for Wells Fargo student loans
- Bankruptcy for College Ave student loans
- Bankruptcy for SunTrust Bank student loans
- Bankruptcy for Earnest student loans
- Bankruptcy for Custom Choice student loans
- Bankruptcy for CommonBond student loans
- Bankruptcy for Citizens Bank student loans
Contact a student loan bankruptcy lawyer today
While you can discharge student loans in bankruptcy, it is a very challenging process. It requires several steps including filing for bankruptcy, filing an adversary proceeding, and then proceeding to a trial.