Discharging Student Loans in Bankruptcy: How It's Done
If you’re having trouble paying back your student loans, you may have the option to get them deferred or your payments reduced. But that’s only delaying the inevitable—you’re not really off the hook for those loans. In many cases, you may wind up paying more over the long run—as your interest will continue to accrue during your break.
There are a few ways to get federal student loans forgiven, but they usually involve working for the government or paying them back steadily for twenty years or more. If neither of those things are an option for you, your only hope may be bankruptcy.
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However, it’s notoriously difficult to get rid of student loans in bankruptcy court. In the early 70’s, there was no difference in the way bankruptcy courts treated student debt and other kinds of debt. However, after a few reports of doctors and lawyers filing for bankruptcy after graduating from school to avoid paying their federal loans back, Congress tightened the restrictions in 1976.
The goal was protecting taxpayer money from unscrupulous bankruptcy filings—and the rules were periodically tightened until it was almost impossible to eliminate a federal student loan. But in 2005, the same protections were extended to for-profit lenders. So now, discharging a private loan in bankruptcy is just as difficult.
Succeeding in getting your student loans—public or private—discharged in bankruptcy court often requires proving that the loans present an “undue hardship.” However, this is an extremely vague term, typically left up to the interpretation of individual judges.
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And the standard is quite high. Most judges use the Brunner test, a set of standards named after a set of guidelines laid out in a past bankruptcy case that identified the terms under which a student loan should be discharged.
First, judges must determine whether the debtor has made a real effort to repay their debt—by searching for a job, earning a paycheck, and reducing their spending. The judge must also look at the debtor’s income and budget to determine whether he or she put everything they could toward the debt. The expectations here are quite strict; frequently, debtors are expected to put everything they make after paying for basic needs such as food, shelter, and health insurance toward the loan.
The third standard—the “certainty of hopelessness”—is the one that makes it the most difficult to discharge a student loan in bankruptcy court. After examining the debtor’s finances, the judge must predict whether the individual will ever be able to land a better job and make paying off the loan feasible. Usually, the only time that standard can be met is if the debtor has a debilitating disease that keeps them from working—and is never going to get better.
The standard is high—some defense lawyers have started calling it the “iron lung” standard, because you practically have to be in one to meet it. And it can be difficult even to find a lawyer to handle a bankruptcy case involving a student loan. However, there are some signs that the situation may not be as bleak as it appears. According to this New York Times article*, two separate academic studies found a higher percentage of bankruptcy cases involving student loans succeeded than expected—one study found 57%, while another found 39%.
Discharging your student loans for traditional or accredited online colleges in bankruptcy may be difficult—but, especially if you do have an illness that could prevent you from earning more, it may be more worthwhile than you think to try. Many do not succeed. However, if it could relieve you from crushing student debt, it may be worth a shot.
More About Understanding Student Loans
- Credit Repair Services You Should Never Pay For
- Questions You Should Ask Before Applying for Student Loan Forbearance
- The Bank on Students Act: What It Is, and How It Could Help Student Borrowers
- How the Death of a Co-Signer Can Affect Your Student Loan
- Peer-to-Peer Student Loans: What They Are, and How They Can Help You Pay for College
- If You're Unable to Work Because of a Disability: What Happens to Your Student Loan?
- New Rules for Debt Collectors: How They Could Affect Your Student Loan
- Having Trouble Repaying Loans? The Department of Education May Be in Touch