Student Loans and Bankruptcy
Student loans are non-dischargeable in a bankruptcy case unless you can establish undue hardship. Establishing undue hardship requires that you or your attorney file an adversary proceeding in the bankruptcy case. Undue hardship is a difficult standard to meet and is rarely met unless you can show that paying your student loans will not allow you to maintain a minimum standard of living for you and your dependents. The standard that is generally used to establish undue hardship in a bankruptcy case is found in the Brunner case. This standard requires that you meet a three-part test:
- Based on current income and expenses, the debtor cannot maintain a “minimal” standard of living for herself and her dependents if forced to repay the student loan debts.
- There are additional circumstances that indicate this state of affairs is likely to persist for a significant portion of the student loan repayment period.
- The debtor has made good faith efforts to repay the loans.
Most individuals in a bankruptcy case will fail to meet the above standards. An example of a person that may meet the above standards is a debtor who has a permanent disability that will prevent them from earning income sufficient to sustain their family during the student loan repayment period.
Other options may be available for assisting you in repaying your student loan both in bankruptcy and outside of bankruptcy. Below is a list of some of the options available to repay or cancel your student loans:
1) Student Loan Debt Consolidation in Chapter 13 Bankruptcy- You can consolidate your student loans into a repayment plan in a Chapter 13 bankruptcy. Although your student loans will not be discharged in bankruptcy, consolidating the student loans into one repayment may help you pay down the amount of your student loans. You can also challenge the student loan balance in a Chapter 13 bankruptcy and get a determination by the court on the amount that is actually owed. This can reduce the outstanding balance if the company did not properly charge interest or penalties in accordance with the law.
2) Student Loan Debt Consolidation Outside of Bankruptcy- Many companies offer you the option to consolidate your student loans. Generally, as part of this process you may be able to reduce your interest rate and therefore decrease your monthly student loan payments.
3) Student Loan Deferment – If you are experiencing a temporary hardship then you can request that your student loans be placed in deferment, which will suspend your payments for a period. Generally, deferments are granted if you are not in default on your student loans and you are experiencing a hardship such as loss of income or unemployment.
4) Cancellation or Forgiveness of Student Loans – You may be able to cancel or have your student loans forgiven if you meet specific requirements. Loan forgiveness and cancellation of student loans are generally available for teachers and public service jobs.
Public Service Loan Forgiveness & Cancellation of Debt for Teachers –Using Chapter 13 Bankruptcy to Repay Your Student Loans