Unlike credit card, medical, and other consumer debts, student loans don’t automatically go away in bankruptcy. You need to take an extra, challenging, and costly legal step known as an adversary proceeding. It’s stressful and difficult to meet the strict legal tests to succeed, and most debtors don’t even try.
The Previously Only Alternative: Adversary Proceeding
Until recently, if your goal was to discharge your student loan via bankruptcy, your only viable path was to file an adversary proceeding. This is a lawsuit filed separately from but related to your bankruptcy case to demonstrate undue hardship. Because the bankruptcy code doesn’t define undue hardship, the standard is left open to judicial interpretation. That makes it difficult to predict whether your loans are dischargeable, but it also gives judges the flexibility to decide on a case-by-case basis.
Some private loans may not require you to file an adversary proceeding and show proof of undue hardship. Certain loans can be discharged in a normal bankruptcy proceeding. These may include loans for fees and living expenses that you incur during a medical or dental residency or while studying for the bar exam. You may also be able to discharge loans that exceed a school’s cost of attendance.
Recent Developments in Student Loan Dischargeability
In each of the five years before the pandemic, roughly a quarter-million people who had student debt filed for bankruptcy. This led the government to spearhead change by complementing the adversary proceeding. More people in bankruptcy have started using a new legal process that the Justice Department introduced in November 2022. The process is supposed to make the ordeal easier, fairer, and more transparent by establishing clearer legal standards that allow you to present your case in a simplified form.
Under the new guidelines, you can complete an “attestation form,” which the government uses to help determine whether to recommend that your student loan be discharged. If you meet certain requirements — including having expenses that exceed your income — government lawyers will recommend a full or partial discharge.
The new process is less risky and less expensive, and it allows bankruptcy attorneys to project whether you have a good chance of success before you file your case.
Steps Toward Simpler Student Loan Discharging
The first real step in discharging your student loans in bankruptcy is to find an experienced bankruptcy attorney to help you. Although it’s not required, the U.S. court system will strongly recommend you do so to guide you through what’s often a very complex process.
Your attorney can help you prepare your case and choose which type of bankruptcy to file. Chapter 7 bankruptcy lets you get rid of most of your unsecured debts, while Chapter 13 requires you to restructure and repay some or all of your debts over time.
The attestation form that you’ll be required to fill out will provide information to the government about your loans and finances. Among other things, the form asks for your household income and expenses, family size, and details such as previous efforts to repay the debt. The Justice and Education departments will review your attestation form and may recommend a discharge. However, the judge will make the final determination of whether you’ve met the undue hardship standard. You’ll still need to file the adversary proceeding that formally asks the court to discharge your student loans in bankruptcy.
Proving Undue Hardship
Courts commonly use one of two distinct tests to determine whether you’re experiencing undue hardship from your student loans:
Brunner Test. According to this test, you can discharge your student loans in bankruptcy if
- Making your loan payments prevents you from maintaining a minimal standard of living for yourself and your dependents based on your income and expenses.
- Your current financial situation likely won’t change for a significant portion of your student loan repayment period and
- You’ve made a good-faith effort to repay your student debt.
Totality of the Circumstances Test. With this test, based on the information you provide, the court reviews all of the relevant factors of your situation to determine whether an undue hardship exists.
Alternatives to Bankruptcy for Your Student Loans
If your situation doesn’t qualify you for student loan discharge, you may consider other ways to get relief or to pay off your debt with more affordable terms.
Federal income-driven repayment (IDR) plan. IDR plans are only available for federal student loans. These plans base your monthly payment on your income and family size. In some cases, you may be able to reduce your monthly payment to as low as $0. Any remaining loan balance will be forgiven after you’ve made payments on an IDR plan for 20 to 25 years.
Federal loan forgiveness programs. You may be eligible for Public Service Loan Forgiveness if you work for a qualifying government or not-for-profit organization. This program forgives the balance on your federal student loans after you make loan payments for ten years while working full-time for a qualifying employer. Or, you may be eligible for federal student loan forgiveness of up to $17,500 through the Teacher Loan Forgiveness Program.
Deferment or forbearance options. Solutions like deferment or forbearance let you stop making your federal student loan payments temporarily or reduce the amount you pay each month. With forbearance, interest will continue to accrue on your loan balance, while interest gets suspended in deferment.
Refinancing. You can refinance your federal and private student loans by taking out a new private loan to pay off your original debt. You’ll then make payments on the new loan over time. Although this may be a good option if you can get a lower interest rate, you will lose some important protections that a federal loan might afford you.
Get in Touch With Richard P. Arthur
Richard P. Arthur, Attorney at Law, can provide advice about how to handle your student loan in the context of bankruptcy. You can call 937-254-3738 for a consultation. He has more than three decades of experience helping clients in Dayton and Trotwood, as well as Montgomery, Greene, Miami, Clark, and Warren counties.