Under certain circumstances, borrowers may be eligible to have their student loans reduced or eliminated altogether ("discharged"). These instances can include death, total and permanent disability, and identity theft. But what about filing for bankruptcy?
The bankruptcy discharge option for student loan borrowers is often misrepresented. Perhaps you've heard that this cannot get rid of your student loans? Well, here's a little secret: it can—it's just not easy to do. Here's how it works.
To have your loans discharged through bankruptcy, you need to prove to a bankruptcy judge that repaying your student loans would cause you and your dependents an undue hardship. Bankruptcy courts typically use the Brunner Test to determine this.
All of you law students out there may be familiar with the Brunner Test, but here's an explanation for us non-law aficionados. This test involves showing the judge three things:
- You made a good faith effort to repay your student loans. (You have a history of making payments even if they were less than the required amount.)
- You can't maintain a "minimal" standard of living if you have to repay your student loans based on your current income and expenses. (Basically, you run the risk of becoming homeless if you have to pay these loans back.)
- Your financial situation is unlikely to improve over the life of the student loan. (You're probably not going to earn a whole lot more 10 or 20 years from now.)
If you can satisfy these requirements, you may have a case for discharge. You will want to work with a bankruptcy attorney to discuss your options; also, keep in mind that different courts may apply the Brunner Test in different ways—or may use a different criterion all together.
Talk To Professionals About Bankruptcy
Bankruptcy is not something to enter lightly—it will impact how you access credit for years to come. If you are thinking about filing for bankruptcy, start by talking to a bankruptcy lawyer. It's important to note that seeking a discharge of your student loans requires you to not only file a bankruptcy petition, but also to initiate an adversary proceeding against your loan holder on the basis of undue hardship.
After you have made the decision to file bankruptcy based on your whole debt and credit history, discuss with your bankruptcy lawyer the possibility of qualifying for a federal student loan discharge on the basis of undue hardship. Bankruptcy decisions are very specific, so only your bankruptcy lawyer will be able to advise you about how your student loans may be treated. In 2010, 99.9% of debtors who filed for bankruptcy did not even attempt to have their student loans discharged. Of the 0.01% who tried, 40% succeeded in getting all or a portion of their student loans discharged.
Every Person's Situation Is Unique
How you handle a difficult situation with your student loans (or your personal finances) will be up to your best judgment. Bankruptcy may affect you for many years to come, including impacting your ability to borrow new loans, interfering with job opportunities, and losing some of your assets.
Remember that federal student loans offer many repayment options. including income-driven ones that will base your payment on how much you make, your family size, and the amount of your student loan debt. You may want to look at these repayment options or forgiveness programs before filing bankruptcy.
In fact, the income-driven repayment option may affect how the Brunner Test sees your situation. If you can qualify for $0 payments (and your income is not expected to change in the future), your debt may eventually be forgiven by the U.S. Department of Education—which may cause the judge to not see a need to discharge it now. Talk to your bankruptcy attorney to discuss how this may affect your case.