Is it worth using bankruptcy to free yourself from student loans?

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In a Nutshell

Discharging student loan debt in bankruptcy is possible, but it’s rare and difficult to prove the necessary legal standard of “undue hardship.” If you want to lessen the burden of your student loans, there are several less-challenging options available.

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If you’re drowning in student loans with no solution in sight, you might have considered declaring bankruptcy.

Unfortunately, discharging student loans in bankruptcy can be one of the most challenging tasks in what’s already a complicated legal process. Still, trying to get rid of student loans in bankruptcy can make sense for some borrowers. If you think it might be worth the effort, here’s what you should know before getting started.


Is it even possible to discharge student loan debt in bankruptcy?

Discharging your student loans in bankruptcy isn’t impossible, but it requires navigating a challenging process that can be difficult to prove. If you’re going to try to get out from under your loans in a bankruptcy, you should understand the requirements to qualify.

“Getting your loans discharged in bankruptcy is theoretically possible, but it’s not your ordinary bankruptcy proceeding, and it’s incredibly difficult,” says Mark Kantrowitz, publisher and vice president of research for SavingForCollege.com.

According to one study, only 0.1% of student loan borrowers declaring bankruptcy even try to get their student loans discharged. Of that fraction, 40% succeed. In other words, just 0.04% of people who have filed for bankruptcy and sought to have their loans discharged received either a full or partial discharge of their student loans.

If nothing else, these stats prove that student loan discharge is possible. But the legal requirements are discouraging — and for those who do try, it’s a tough proposition.

Under current law, student loans can’t be claimed in a bankruptcy except in certain circumstances. The only way these loans can be discharged is if they’re found to cause “undue hardship” on the borrower or the borrower’s dependents.

What qualifies as ‘undue hardship’?

Unfortunately, bankruptcy law is unclear on what makes “undue hardship.”

“Congress never defined what undue hardship means,” Kantrowitz says. “They left it up to the courts to define it.”

Bankruptcy courts are free to use two different tests to decide if the borrower is experiencing undue hardship — the Brunner test and the Totality of the Circumstances test. According to Kantrowitz, the Brunner test is far more widely used.

Under the Brunner test, the debtor must prove three things.

  1. “He or she cannot maintain, based on current income and expenses, a minimal standard of living for himself or herself and any dependents if forced to repay the loans.”
  2. “Additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans.”
  3. “He or she has made good faith efforts to repay the loans.”

How to pursue student loan discharge in bankruptcy proceedings

Meeting the standard of undue hardship is incredibly difficult, so it’s worth speaking with a bankruptcy lawyer to see if it’s even a possibility in your unique situation. However, you may be able to claim it under certain circumstances, such as living with a permanent disability or terminal illness.

Even if you think you meet the standard of undue hardship, it’s important to understand that discharging student loans involves additional work on top of the standard bankruptcy proceeding.

“It’s not as simple as filing for bankruptcy,” Kantrowitz says. “It’s an adversary proceeding within a bankruptcy proceeding. That means the lender gets to defend against bankruptcy discharge.”

Preparing for the adversary proceeding

The court will look at a number of factors in determining undue hardship. One factor it will likely consider is whether you made a good-faith effort to repay your loans. That good-faith effort may include trying to rearrange your payment schedule. If you haven’t already, contact your loan servicer and ask about alternative payment plans. You could end up reducing your monthly payment amount or even postponing making payments altogether.

If your lender refuses to adjust or pause your payments, document whom you spoke to and the date and time of the call. You might need to use this information as evidence in court.

You may also need to present information on your income, budget and debt burden during the adversary proceeding. In most cases, you’ll have already collected this material as part of the overall bankruptcy filing process.

What outcome to expect

If you pursue student loan discharge in bankruptcy, there are three possible outcomes.

  • Full discharge: The court may decide that your debt will be fully discharged, and you will not have to make any more payments.
  • Partial discharge: A portion of your debt may be discharged, but you’ll be responsible for the rest based on your individual circumstances and ability to repay. For example, a court may decide that you cannot repay your private student loans and discharge them, but you may still have to repay your federal loans, because you’d be able to afford to cover them under an alternative payment plan.
  • No discharge: You may be required to repay the full balance of your loans. However, the court may adjust other aspects of your loan, such as your interest rate, if it determines that such a change would make repayment financially possible for you.

It’s important to keep in mind just how few people who file for bankruptcy will end up with one of the first two outcomes. As we noted above from a 2011 study, just 0.04% of people who declared bankruptcy and sought to have their loans discharged received a partial or full discharge of student loan debt.

Plus, even a successful discharge of student loan debt carries the long-term effects of a bankruptcy on your credit. The bankruptcy process isn’t for everyone, and it’s important to understand the details before taking any action.

What’s the difference between Chapter 7 and Chapter 13 bankruptcy?

Other options if you don’t qualify for bankruptcy discharge

If discharging student loan debt in bankruptcy isn’t a realistic option for you, don’t give up hope. There are other options that could give you some relief from these debts.

1. Income-driven repayment plan

If you have federal student loans, you can apply for an income-driven repayment, or IDR, plan to get a lower monthly payment.

Under these plans, your loan servicer — the company that manages your federal loans — extends your repayment term to 20 to 25 years and caps your payments at a percentage of your discretionary income. There are currently four IDR plans — Income-Based Repayment, Income-Contingent Repayment, Pay As You Earn and Revised Pay As You Earn — with differences based on eligibility and the terms of payment.

According to Federal Student Aid, an office of the U.S. Department of Education, most borrowers will qualify for at least one IDR plan. Some borrowers will qualify for payments as low as $0, which could give you significant financial relief from your loans. With a $0 payment, borrowers only have to make payments on their loans if their income changes.

You can use the federal Repayment Estimator to calculate how much your payment would be under each of the four plans. You can also apply for an IDR plan online.

2. Deferment or forbearance

If you’re going through a temporary financial hardship, such as a job loss, you may be able to postpone making your payments with a deferment or forbearance.

All federal loans are eligible for both deferment and forbearance.

  • Deferment: If you have certain kinds of federal loans, you can temporarily stop making payments. During a deferment for certain loans, you may not have to pay the cost of interest that accrues on your loan while your loans are in deferment.
  • Forbearance: With a forbearance, you can postpone making payments for up to 12 months at a time. Unlike a deferment, you must pay the accrued interest after this period ends.

Not all private loan lenders offer deferments or forbearance, but some allow you to temporarily halt payments or make interest-only payments for a few months. For example, Sallie Mae allows some borrowers facing financial difficulties to stop making payments for three months at a time. The agreement can be renewed for up to 12 months.

3. Loan discharge because of disability

If you are disabled, you may be able to get your loans discharged without having to go through bankruptcy proceedings.

With certain federal loans, Total and Permanent Disability Discharge is available to those who are totally and permanently disabled. If you’re eligible, the loan servicer can forgive the total remaining balance of your loans. For more information and how to apply, visit DisabilityDischarge.com.

Although not all private loan lenders offer discharges in the case of disability, some do. For example, College Ave will forgive the remaining balance if the borrower becomes permanently disabled.

If you have a disability and want to apply for a loan discharge, contact your lender directly via the customer service department. Explain your situation and what has changed since you took out the loans, and ask if the lender offers loan discharges in the case of disability.


Bottom line

Student loan discharge in bankruptcy is rare enough that it’s important to consider other options for making your debt more manageable. Whether it’s signing up for an income-driven repayment plan or trying a deferment or forbearance, there could be a less challenging way to manage your debt burden.