Bankruptcy and Student Loans
Student Loan Debt and Filing Bankruptcy
No one actually wants to file bankruptcy, but when a person has exhausted every other option to get out from under the mountain of debt they have incurred, bankruptcy may be the only option left to them. Unfortunately, what many people considering filing bankruptcy are not aware of is that student loan debt is one of several debts that are not automatically eliminated.
Others include federal, state and local taxes, spousal support, child support and a few others. For some, their student loan debt is the main reason they are considering bankruptcy, so not being able to get rid of it through filing renders the decision pointless. Regardless of the type of debt you have, bankruptcy is not a decision to be taken lightly, as while you may be ‘out of debt’ there are consequences that must be taken into consideration.
Before Consulting A Bankruptcy Lawyer
Chances are that if student loans make up the majority, or even all, of your debt, bankruptcy is not the answer. Given that many people are unsuccessful in getting their student loans discharged, it is important that you have made every attempt to ‘make good’ on them first. With interest charges accruing the situation may seem hopeless as the debt just continues to increase.
Student Debt and The Law
While bankruptcy will forgive you of the majority of your debt responsibilities, student loan debt is subject to different rules. Although not impossible to achieve, it can be difficult to get your student loans forgiven, and in some cases the courts do not look favorably upon anyone trying to get out of paying student loans back.
The Exception to the Rule
In extreme cases of undue hardship, there is an opportunity to have your student loan debt canceled completely. However, this does involve ‘jumping through hoops’ so it should not be taken on unless you have reasonable cause to believe that you qualify. Your lawyer will be able to advise you whether he or she feels you have a good chance of having your request to discharge your student loans approved.
The Next Step
Assuming that your lawyer feels you have a good case and you can prove undue hardship, in addition to the normal bankruptcy filing process you will be required to file a petition (referred to as an adversary proceeding) that specifically requests elimination of student loan debt. This should be filed in conjunction with your bankruptcy.
If you have already filed bankruptcy but not yet had it granted / approved, you can still file a petition to have your student loans discharged, so do not feel that it is too late. Bear in mind that with this petition you are asking the court to make an exception for you due to your circumstances, so the decision to grant it will not be automatic.
The Brunner test is a test that many courts use to assess your circumstances, to ascertain whether by having to repay student loans you and any dependents you may have will suffer undue hardship.
The definition of ‘undue hardship’ varies from court to court, but as a general rule to qualify you will need to be living a very sparse lifestyle. This may include an inability to afford such things as Internet, cell phone, satellite or cable television and the like, as these are not considered necessities of life.
- You will be required to provide proof of undue hardship. This may entail providing proof that a significant portion of your income would go to student loan repayments and leave you with insufficient income to live on.
- Your future income potential doesn’t indicate an ability to repay student loans.
- You may also be requested to provide proof that you have made every attempt to pay back your student loans. It is wise that even if you cannot make the full payments each month, you pay something on a regular basis to show good faith. If the court sees no attempt to pay, your petition may be denied without further consideration.
The Two Forms Of Bankruptcy
- Chapter 7 – This form of bankruptcy, if granted, will forgive you of your student loan debts by completely canceling them out, along with all other debt included in the bankruptcy. You will never be required to pay them back.
- Chapter 13 – This form of bankruptcy requires you pay off your debt (including student loans) over a period of 3 to 5 years. The court appoints a trustee who will take all of your excess income and divide it evenly among your creditors. Your student loan providers are unable to demand full payment during this period. If at the end of the 3 or 5 years you are still unable to pay your student loans back you can then file a petition to ask for them to be discharged due to undue hardship, if applicable.
What To Do Now
Your lawyer will guide you through the bankruptcy process, but in addition to the legal requirements there are things you can do to increase your chances of having your bankruptcy petition approved.
- Keep making regular payments on your student loans. Obviously you are not able to make the full payments requested, but by paying something regularly you have proof to show the courts that you are trying to pay.
- Do not make luxury purchases, take a vacation, or anything else that may indicate that you are not taking your bankruptcy seriously and do not qualify to have your student loans discharged due to undue hardship. Anything that is not considered an absolute necessity could be considered a luxury under your current circumstances.
Consequences of Bankruptcy
- There are fees required plus the cost of hiring a lawyer to file for bankruptcy.
- Your credit will reflect your bankruptcy for 10 years, and your credit score will be lowered by it. It can take a long time to build your credit score back up again. Any future loans you may apply for could denied due to your bankruptcy being on record, although not every lender will see it as being sufficient reason to do so, particularly if it happened several years prior.
- Getting another student loan could become extremely difficult as a result of your bankruptcy, particularly when it is revealed that the major reason for filing bankruptcy was to be forgiven your previous student loans.
It may be that there are still options you have not explored and you feel that you have done everything you can and bankruptcy is the only answer. This is one situation in which you should not try and ‘go it alone’. A bankruptcy lawyer will prove to be invaluable to you as you go through this process. Any ethical lawyer will discuss your options before beginning the bankruptcy process. He or she may know of other options you may not be aware of to avoid filing, and openly discussing your situation with him or her will give them a good overview of your debt, current living circumstances and your future earning potential.
When interviewing bankruptcy lawyers ask them about having your student loan debt discharged as part of the bankruptcy. If they tell you it is not possible to do so, then chances are they have no experience of doing so. Find someone who has been successful in cases similar to yours. Once you have selected the lawyer to represent you, tell him or her up front that you want your student loans discharged as well as other debts. He or she should know which courts are more likely to approve your petition to discharge student loans.