Student Loan Blog Series VIII: Bankruptcy
One of the most common questions encountered in bankruptcy is whether you can discharge your student loans. Although it is possible, it is extremely difficult and the court rarely grants such a discharge.
Discharge Student Loans Through Bankruptcy
The standard under which student loans are discharged through bankruptcy is if repayment would cause you “undue hardship.” This standard applies to all your student loans, from private to federal. In determining whether you would encounter “undue hardship,” the bankruptcy court applies the Brunner test by looking at three factors:
1) Poverty – Based on your current income and expenses, you cannot maintain a minimal living standard and repay the loans.
2) Persistence – In addition to being currently unable to repay your loan, you must demonstrate that you will continue to be unable to repay for a significant portion of the repayment period.
3) Good faith – You must have made a good faith effort to repay back your debt.
A discharge of student loans is unlikely if any of the three factors are absent and/or are not presented strongly. To make matters more difficult, some bankruptcy courts have been known to consider other factors as well, examining the totality of your circumstances surrounding your financial situation. Generally, courts look for reasons to deny student loan discharges.
Effects of Chapter 7
However, even if you cannot discharge your student loans through bankruptcy, the bankruptcy process still has some impact on how you repay back your student loans. When you file a Chapter 7 bankruptcy, an automatic stay is imposed on all collection efforts by your creditors. This means that your creditors cannot take any action to collect from you. This automatic stay applies equally to your student loan creditors. Therefore, during the duration of your Chapter 7 bankruptcy process, your student loan creditors cannot call you, garnish your wages, or levy your bank account.
Effects of Chapter 13
On the other hand, filing a Chapter 13 bankruptcy would impact your student loan repayment. Chapter 13 allows you to consolidate your debts, and you submit a plan to repay your creditors over three to five years. The repayment plans allow you to get caught up on mortgages, car loans, and even your student loans. One advantage of filing a Chapter 13 bankruptcy is that your court approved repayment plan will determine the size of your student loan payments, not your student loan holder. Furthermore, similar to a Chapter 7, there is an automatic stay that prevents your student loan holders from taking any collection actions against you. However, you will still be responsible for the remaining student load amount upon the conclusion of the payment plan.
In addition to managing your student loan debt, you should also consider reading our blog series on credit debt. Together, you can manage all of your debts into something more manageable.