Introduction
Student loan debt is the second-largest category of consumer debt after home mortgages. It’s also rising faster than any other kind of consumer debt, with the average borrower owing $33,000 by the time they graduate. But if you’re struggling to pay back your student loans and you’re considering bankruptcy as a way out, you might be wondering if it’s possible to get your student loans discharged in bankruptcy. Well here’s the good news: yes and no. Let me explain what exactly is student loan bankruptcy, when can student loans be discharged in bankruptcy, and why do some student loans get discharged in bankruptcy but not others? how bankruptcy affects your ability to obtain new student loans later on? who will be eligible for discharge under the new bill? and much more! Can Student Loans be Discharged in Bankruptcy?
What exactly is student loan bankruptcy?
Student loan bankruptcy is a process that allows student borrowers to discharge their federal and private student loans in bankruptcy. The basis for the dischargeability of student loans in the United States comes from two areas: federal law, which governs all federally-backed student loans, and state law, which governs private student loans.
To be eligible for a discharge of your education debt under either type of law, you must meet certain criteria set forth by Congress or approved by state courts. For example, under federal law, you must prove that paying back your loan would cause “undue hardship” on you and/or your dependents if you were forced to repay it (that is to say if we assume for argument’s sake that everyone had equal access to credit).
The standard used by most states when considering discharging private educational debts under state laws is similar but generally more liberal than the federal standard—as long as repayment would put an undue burden on someone with minimal income (and not just an unemployed person), he or she may be eligible for bankruptcy protection from their educational debts without having first obtained an undergraduate degree (though there are exceptions).
When can student loans be discharged in bankruptcy?
While the vast majority of student loans cannot be discharged in bankruptcy, there are a few situations where you may qualify to have your loans discharged.
For example, if you can prove that paying back your student loans would cause an undue hardship on you or your family, then your loan could be discharged by the court. Undue hardship is defined as when it would prevent someone from maintaining a minimal standard of living.
You must provide evidence that making payments on these debts will create significant financial harm for yourself and/or others dependent upon you (such as children). To prove undue hardship, first, consider all available sources of income and cash flow. If there is still not enough money after paying off all expenses each month (including housing/rent), then this could serve as evidence that paying off debt would create an undue burden that prevents one from maintaining a minimal standard of living—and thus eligibility for discharge under Chapter 7 bankruptcy protection laws.”
Why do some student loans get discharged in bankruptcy, but not others?
Student loans that are not held by the federal government.
Student loans that were not consolidated.
Student loans that are not in default. Student loan debt can be discharged if the borrower is unable to repay it because of “undue hardship,” but this is a very difficult standard to meet, especially when you’re trying to discharge student loan debt on your own without help from an attorney or advocate who specializes in bankruptcy law. For example, even if your income is low enough that you have trouble paying off your debt, it’s hard for a court to determine whether this situation will last long enough for you not to be able to afford your payments over time
How can bankruptcy affect your ability to obtain new student loans later on?
If you have a dischargeable student loan, then you won’t be able to get new student loans later on. In fact, not only will you be unable to get new loans but any lender will be able to see that there is an outstanding student loan debt that needs to be paid back and they can require the full amount of your debt from the beginning.
If this happens and you do not have enough money saved up for your monthly payments, then it may affect your ability to live comfortably.
Who will be eligible for a student loan discharge under the new bill?
If you’re like many Americans, your student loans may be holding you back from buying a home or other major purchases. But there’s good news: The Student Loan Repayment Assistance Act of 2019 could help eligible borrowers discharge their federal student loans in bankruptcy.
Borrowers with “unpaid, high-cost student loans” will be eligible to receive debt forgiveness under this new bill if they meet certain criteria. This includes paying on the loan for at least 20 years and meeting income-driven repayment plans (IDRs).
Only a small percentage of borrowers will ever qualify.
Only a small percentage of borrowers will ever qualify to have their student loans discharged in bankruptcy. You must prove undue hardship, which is a very high standard that most people aren’t able to meet.
You have to show that you can’t pay your loans and that your situation is likely to persist for the rest of your life. In practice, this means showing that it’s impossible for you to find a job or live on any kind of budget with student loan payments attached.
Conclusion
If you’re thinking about filing for bankruptcy, it’s important to understand how it will affect your student loan debt. You may be surprised to learn that only a small percentage of borrowers will ever qualify for student loan discharge in bankruptcy and even fewer have experienced good results from doing so. If you have questions about your situation or need help getting back on track with making payments on your loans, contact us today!