Understanding Student Loans and Bankruptcy
Before we dive into student loan bankruptcy, it’s essential to understand the two main types of student loans: federal student loans and private student loans.
- The U.S. Department of Education offers federal student loans, which often come with benefits such as income-driven repayment plans, forgiveness programs, and deferment or forbearance options. Federal student loans also typically have lower interest rates compared to private loans.
- Private student loans: These loans are provided by private lenders such as banks, credit unions, or other financial institutions. They don’t offer the same benefits or protections as federal student loans, and they often have higher interest rates.
When it comes to bankruptcy, the process for discharging student loans varies between federal student loan debt and private loans. However, both types of loans can be discharged in bankruptcy under specific circumstances, though it’s not easy.
The Bankruptcy Process for Student Loans
Filing bankruptcy is a legal way to get relief from overwhelming debt, but it doesn’t automatically wipe away all of your obligations. The bankruptcy court looks at your financial situation and determines which debts can be eliminated and which ones must be repaid. In most cases, student loan borrowers are still required to continue making student loan payments even after filing for bankruptcy.
But there is a way to discharge student loan debt in bankruptcy, though it requires proving that paying the loans would cause you undue hardship.
Undue Hardship and the Brunner Test
To have student loans discharged in bankruptcy, you need to prove that paying back the loans would create an undue hardship. While bankruptcy law doesn’t clearly define undue hardship, courts often use the Brunner Test to assess whether an individual qualifies. The Brunner Test is a set of three factors that a bankruptcy judge will consider to determine if discharging your student loans is warranted. These factors are:
- Present ability to repay: The court will look at your current financial situation, including your income, living expenses, and any other debts you might have. If you are unable to maintain a minimal standard of living while repaying your loans, you may meet this criterion.
- Future inability to repay: The court will also look at whether your financial situation is likely to improve in the future. For example, suppose you have medical bills, a chronic injury, or another condition that makes it difficult for you to work or earn an income. In that case, the judge may find that you will likely be unable to repay your student loans in the future.
- Reasonable faith efforts to repay: The court will also evaluate whether you’ve made reasonable faith efforts to repay your loans in the past. If you’ve consistently made monthly payments or tried to work out a repayment plan with your loan servicer, this could work in your favor.
If you can prove all three factors under the Brunner Test, the court may agree to discharge student loans in bankruptcy. However, it’s essential to note that this standard is challenging to meet, and bankruptcy courts rarely discharge student loan debt.
Adversary Proceeding: What’s Involved?
An adversary proceeding is a separate lawsuit filed within the bankruptcy case to determine if your student loans can be discharged. To start an adversary complaint, you must file an individual petition with the bankruptcy court and prove that repaying your student debt would cause you undue hardship.
In an adversary proceeding, both you and your loan servicer (or other creditor) present evidence to the bankruptcy judge. This may include financial documents, testimony about your ability to pay, and proof of your efforts to work out a repayment plan or reduce your loans through federal student aid or debt settlement options.
The adversary complaint process can be time-consuming, expensive, and complex. Many student loan borrowers opt to work with a tax professional, student loan attorney, or bankruptcy lawyer who specializes in this area to help go through the process.
