Can you pay off your student loans in bankruptcy?
This is one of the most searched student loan questions on Google: Can you pay off your student loans in bankruptcy?
The quick answer is that student loans are generally not dischargeable in bankruptcy. However, there are exceptions.
Here’s what you need to know.
Student loans: why student loans traditionally cannot be discharged in bankruptcy
As many borrowers struggle to repay their student loan debt, bankruptcy is a strategy that is offered as a potential option.
According to Make Lemonade, there are over 44 million borrowers who collectively owe $ 1.5 trillion in student loan debt in the United States.
Unlike other types of consumer debt such as credit cards and mortgages, student loans traditionally cannot be discharged in bankruptcy. In 2005, Congress passed and President George W. Bush signed the Bankruptcy Abuse Prevention and Consumer Protection Act, which exempted federal and private student loans from the discharge.
You may be asking yourself, “Why are student loans not dischargeable in bankruptcy?” “
Some cannot explain the rationale for the “no bankruptcy” exception for student loans, but others say it arose out of fear that student loan borrowers could take advantage of bankruptcy laws. , borrow a bunch of debt, get a degree and then file for bankruptcy.
However, there are exceptions if the borrower can demonstrate that he has been under undue hardship.
The Brunner test: financial difficulties
Congress did not specifically define “undue hardship”.
Thus, the main criterion for undue hardship is Brunner test, which is the legal test in all shorts except 8th and 1st circuit. The 8th circuit assesses a set of circumstances, which is akin to Brunner, while the 1st circuit has not yet declared a standard.
In fluent English, the Brunner standard says:
- the borrower has extenuating circumstances creating such a hardship that he cannot repay the student loan and maintain a minimum standard of living;
- these circumstances are likely to persist for the duration of the student loan repayment; and
- the borrower made a good faith attempt to repay the loan. (The borrower doesn’t actually have to make payments, but is just trying to make payments, such as trying to find a workable payment plan.)
There are variances between federal districts, but this is the basic framework. The courts can also assess other financial and life circumstances of the borrower, such as age, income, health and other factors.
How can you pay off student loans in bankruptcy?
In order to have a student loan discharged through bankruptcy, an adversarial proceeding (a lawsuit in bankruptcy court) must be filed, where a debtor claims that paying the student loan would create undue hardship for the debtor.
Could you ever pay off your student loans in bankruptcy?
Yes. Before 1976, you could pay off your student loans in bankruptcy.
Congress then changed the law: student loans were dischargeable if they had been repaid for five years. This period was subsequently extended to seven years. In 1998, Congress removed the exemption unless a debtor could prove that paying off student loans would create undue hardship. In 2005, Congress extended this protection to private student loans.
Can you pay off both federal student loans and private student loans?
Yes, federal student loans and private student loans are both eligible for discharge if you can demonstrate undue hardship.
Should you file for bankruptcy to pay off your student loans?
It is a personal decision based on your specific life circumstances. When you file for bankruptcy it can be costly and take a lot of time and energy. There may be other options for paying off student loans besides filing for bankruptcy. Usually, bankruptcy is a last option.
What can you do if you are having trouble paying off your student loan?
If you’re struggling to pay off your student loan, here are some helpful strategies:
1. Reimbursement based on income: For federal student loans, consider an income-based repayment plan such as IBR, PAYE, or REPAYE. Your payment is based on your income, family size, and other factors, and is generally less than the standard repayment plan. Your monthly payment could be as low as $ 0.
After a certain period (like 20 or 25 years, for example), your federal student loans (not private student loans) may be canceled. However, you will likely owe income tax on the amount of your student loans that are canceled.
2. Pay off credit card debt: If you have other credit card debt, consider paying off that debt first if the interest rate is higher than your student loan interest rate. You can use the cash savings for student loan repayment.
You can also consider a personal loan to pay off your credit card debt (also called a credit card consolidation loan). Credit card consolidation is the process of paying off your existing credit card debt with one personal loan at a lower interest rate.
If you can borrow a personal loan at a lower interest rate than your credit card debt, you can save on interest charges and potentially improve your credit score.