Typically, erasing your student loan debt is not possible when filing for a traditional bankruptcy. In order to absolve your student loan debt through this process, you’ll have to take an extra step and file an additional suit and provide proof that repayment of your student loan debt will cause you an “undue hardship”.
How To File For Student Loan Bankruptcy
Nearly all general research into filing for bankruptcy will show many results saying there are certain debts that cannot be discharged—private and federal student loans are one such major exemption in bankruptcy… At least, most of the time.
Clearing student loan debt from your financial responsibility is much harder to do than other debts during the bankruptcy, like those of credit cards. However, that does not mean it is not possible for those who truly need a complete financial reset and do not have the means to pay even the smallest of debts.
Make Sure Filing For Bankruptcy Is Right For You
It is important to remember that filing for bankruptcy is not the best financial decision for everyone. There are costs associated with filing for bankruptcy as well as a lasting financial impact that could adversely affect you getting a loan, mortgage, or credit card in the future. Be sure to fully evaluate all of your financial options before resorting to bankruptcy.
Speak With A Professional
Before filing for bankruptcy, speak with a professional to help determine that taking this route really is the best decision for you. A financial advisor or a bankruptcy attorney may be the best professionals to provide insight into the matter, although they are not required to complete the filing process. There are added costs for doing so and if you can afford either, you may be denied having your private or federal student loans discharged.
File Chapter 7 or Chapter 13 Bankruptcy
Before you can have your student loans discharged, you’ll first need to initiate the bankruptcy process. There are many chapters of bankruptcy that can be filed but the primary two for consumers (i.e. individuals and not businesses) are Chapter 7 and Chapter 13. Chapter 7 primarily erases all of your debt while Chapter 13 focuses on settling your debt for less and establishing a single payment over a specific period of years. Through either you can argue to have your student loans included in your listed debts.
File For An Adversary Proceeding
In order for your student loans to be considered in your bankruptcy proceedings, you’ll need to file for an additional lawsuit aside from your bankruptcy chapter, called an adversary proceeding. In order to request this, you need to write and file a complaint that outlines your case. It is here where you will need to explain how your student loan repayments will cause you an “undue hardship”. The U.S. Bankruptcy Code does not explicitly define “undue hardship”; however, if you can pass the Brunner test, you’ll likely show enough of an “undue hardship” to support your request to discharge your student loan debt.
What is the Brunner Test? A three-part standard for judgement against experiencing a true financial hardship. The Brunner Test can vary from jurisdiction to jurisdiction and even within the same jurisdiction, different bankruptcy judges may have different interpretations of whether or not you have fulfilled this standard.
- A student loan payment would prevent you from being able to afford basic living expenses and have already given up any “extras”. Also, you have already tried all possible ways to increase your current income level with no success.
- In addition to working on your own to improve your income to no avail, there must also be additional circumstances under which prevent your financial situation from improving. For example, a physical or mental disability, a poor-quality education, or maximizing your possible wages/salary in your industry.
- You have made attempts to make payments on your loan. This includes making full payments, (even if they are late or stopped due to a change in circumstances), partial payments, requesting an extended payment plan to get lower payments, negotiating through other means to modify the terms of your loan and repayment plan, or attempting to supplement your income (or cut expenses) in order to make your payments.
Litigation and Decision
The case is then litigated according to regular bankruptcy proceedings and the bankruptcy judge overseeing your case will make a decision regarding your bankruptcy—including whether your student loans will also be discharged with your other debts. It is possible to receive no discharge or a full or partial discharge.