Can You File Bankruptcy on Student Loans?

Can you file for bankruptcy on student loans? You can, but whether or not you will qualify for a discharge is the bigger question.

While most people will not qualify for a discharge through Chapter 7 bankruptcy or Chapter 13 bankruptcy, you can eliminate student loan debt if you can prove that paying your student loans would place an undue hardship on you.

What Is the Undue Hardship Exception?

Courts are reluctant to discharge student loans and only grant discharges in special circumstances. One of those special circumstances is if the student loans would create an undue hardship for you to repay them.

The court may use various tests to determine whether you qualify:

The Brunner Test

The Brunner Test is a three-factor test that determines your eligibility to discharge student loans. If all of the following are true, you may qualify for a discharge:

Poverty: You cannot maintain a minimum standard of living if you’re forced to repay your student loans. Any dependants you have will be factored into the equation. To meet this standard, you must show that you have bare-bones expenses and have made a sincere effort to increase your income without success.
Persistence: Your circumstances are likely to persist for the foreseeable future. For example, you may be able to prove this standard if you have a serious disability or have maximized the income potential in your field of work.
Good faith: You have made a good faith effort to remain current on your student loans. If you have made some payments or tried to negotiate a payment plan, you may be able to qualify for discharge under this standard.

The best proof that you can provide the court is that, no matter what you do, there’s no possibility that you get your loan out of default. This is not easy to prove since income-adjusted repayment options offer payments that work within your income.

Other Tests

Courts may use other standards to determine whether or not your student loan can be discharged. These include considering the totality of your circumstances, or special consideration for those in certain fields.

Since each judge and each judge will have different standards, and different interpretation of those standards, it’s best to speak to a Charlotte bankruptcy attorney to understand what you can expect in your specific case.

What Is the Process for Discharging Student Loan Debt in Bankruptcy?

You must first petition the court for an adversary proceeding. During this proceeding, you will need to prove that remaining current on your student loan payments would constitute an undue hardship. In some cases, bankruptcy attorneys will use expert witnesses to testify on your behalf. It helps if you have a chronic medical condition or the overall economic situation in your hometown makes repayment impossible.

What If You Can’t Prove Undue Hardship?

Even if you don’t qualify for a hardship exemption, bankruptcy may still help your overall financial situation. Some courts will extend forgiveness to part of your loans without granting a discharge of all of your loans.

In both Chapter 7 bankruptcy and Chapter 13 bankruptcy, the automatic stay protects you even from the federal government’s attempt to collect on the loan. But this is only temporary. Once your Chapter 7 has been discharged and your Chapter 13 is completed, you will again be required to continue making payments.

Chapter 7 Bankruptcy and Student Loans

In Chapter 7, all of your unsecured debts are discharged. This includes personal injury judgments, credit card debt, personal loans, and medical bills. Getting rid of this debt can free up your finances to remain current on your student loan, but your student loan debt will survive the bankruptcy.

Chapter 13 Bankruptcy and Student Loans

Chapter 13 bankruptcy allows you to reorganize your debt into an affordable repayment plan. Your student loan payments (or a portion of them) will be rolled into Chapter 13. However, at the end of the Chapter 13, the student loan debt will still be there and you will have to continue to make payments on it. Nonetheless, Chapter 13 bankruptcy can help you manage other debts such as your mortgage, car payments, and unsecured debt.