How to File Bankruptcy on Student Loans

According to the National Student Loan Data System (NSLDS), a staggering $1.6 trillion in student loan debt burdens over 43 million Americans. Although a last resort, bankruptcy offers a potential path for those overwhelmed by student loan debt. This guide will walk you through the process of filing for bankruptcy on your student loans, explore other ways to manage your debt and help you lay the groundwork for a more secure financial future.

Student loan bankruptcy is a legal avenue allowing you to seek relief from your student loan debt. Unlike other debts, student loans aren't automatically discharged in bankruptcy. Borrowers must file an adversary proceeding and prove undue hardship to qualify for student loan debt forgiveness. Courts evaluate factors like income, expenses and overall loan burden, often using criteria like the Brunner test or the Totality test to determine eligibility.

Recent guidelines from the U.S. Department of Justice and the U.S. Department of Education have made the bankruptcy discharge process more transparent and fair for individuals with student loans. However, it's important to note that federal student loans are less likely to be discharged due to their repayment options and strict undue hardship standards.

Filing for bankruptcy to discharge student loan debt is a complex and consequential decision. Here are some first steps you can take.

Navigating the complexities of bankruptcy is a task best tackled with professional help. Although you can technically file independently, an experienced attorney can guide you more effectively and protect your consumer rights. When choosing a lawyer, seek one with specialized knowledge of student loans, good communication skills and transparent pricing. During your initial consultation, discuss your student loan debt and the likelihood of its discharge to gauge if the attorney can meet your specific needs.

Choosing between Chapter 7 and Chapter 13 bankruptcy is critical in your financial recovery journey. Your choice will influence how your assets are managed, the length of the bankruptcy process and the types of debts that can be discharged. Chapter 7 is generally quicker but may require you to liquidate some assets. On the other hand, Chapter 13 allows you to keep your assets but involves a three- to five-year repayment plan. According to the U.S. Courts, between 2005 and 2021, 67% of non-business bankruptcies filed were Chapter 7, and 32% were Chapter 13.

An adversary proceeding is a separate lawsuit within the bankruptcy case, specifically aimed at determining the dischargeability of your student loans. It's usually required because student loans are not automatically discharged in a standard bankruptcy filing.

The timeline for an adversary proceeding can vary, but it generally takes several months from start to finish. The outcomes can differ, ranging from a complete discharge of your loans to partial relief or even outright denial. Remember that this process comes with its own set of costs, including court and attorney fees.

Courts use various criteria to assess undue hardship, and the standards can differ depending on the jurisdiction. The two most widely used tests are the Brunner test and the Totality test.

The Brunner test is a legal standard often used to determine if paying back your student loans would constitute undue hardship. This precedent originated from Brunner v. New York State Higher Education Services Corp. To satisfy the test, you need to prove:

The Totality test (short for “totality of circumstances”) offers a more holistic approach to evaluating undue hardship. This test considers your current and future financial situation, including income, expenses and prospects. Specifically, it looks at three main elements:

Filing for bankruptcy can be a lifeline if your student loan debt is unmanageable, but it's not a decision to be made lightly. Filing has long-term consequences for your financial standing and emotional well-being, including those outlined below.

Bankruptcy isn't the only route for tackling student loan debt. Consider options like income-driven repayment plans and student loan forgiveness programs. These alternatives can offer financial relief without the long-term consequences of bankruptcy.

Deferment and forbearance allow you to pause your student loan payments temporarily. Deferment is often used for federal loans and lasts up to three years. Forbearance is more common with private loans and usually lasts for 12 months. To qualify for deferment, you may need to be enrolled in school, unemployed or facing financial hardship. For forbearance, the criteria can vary by lender but often include financial difficulties or medical expenses.

Income-driven repayment plans adjust your monthly student loan payments based on income and family size. These plans are primarily available for federal loans and come in various types, including the Income-Based Repayment (IBR) Plan, SAVE Plan and Pay As You Earn (PAYE) Plan.

Loan forgiveness programs offer a way to eliminate a portion or even all of your student loan debt. These programs are often tied to specific career paths or public service commitments. Notable programs include Public Service Loan Forgiveness (PSLF) for those in government or nonprofit sectors and Teacher Loan Forgiveness for educators in low-income schools.

Loan refinancing involves taking out a new loan to pay off one or more existing loans, often to secure better terms, such as a lower interest rate or a different repayment schedule. Refinancing can be wise if you have a strong credit score, stable income or interest rates have dropped since you first took out your loans.

Loan consolidation is the process of combining multiple loans into a single loan with one monthly payment. This can be particularly beneficial if you have several federal student loans, as it simplifies your payment schedule and can offer access to alternative repayment plans.

If you're dealing with a physical or mental impairment, you may qualify for an automatic discharge of your student loans under the Total and Permanent Disability Discharge (TPD) program. This program is designed to reduce the financial burden of those unable to work due to a severe condition.

Deciding to file for student loan bankruptcy is a monumental step that should only be taken after exhausting all other avenues. Bankruptcy can offer a way out of student loan debt, but it's generally advisable to consider this route under the following circumstances:

Navigating life after bankruptcy requires having a comprehensive financial strategy. From rebuilding your credit to understanding legal limitations, the road ahead is filled with important decisions.

Bankruptcy can severely impact your credit score, but strategic steps like obtaining secured credit cards and making timely payments can help you improve your score. Here are steps to help you boost your credit score.

Emerging from bankruptcy offers a clean slate to reset your financial priorities. Setting achievable goals can guide you toward long-term stability.

Effective budgeting is crucial for maintaining financial health post-bankruptcy. A well-planned budget can help you avoid falling back into debt.

Navigating the legal landscape post-bankruptcy is crucial, as it impacts your credit and future loan opportunities. Be mindful of legal restrictions and the long-lasting imprint of a bankruptcy record.

Tackling student loan debt can be daunting, but help is available. Below are curated resources to guide you through the process.

• American Consumer Credit Counseling: Provides free consultations and affordable services to help manage and reduce debt.
• Consumer Financial Protection Bureau (CFPB): Provides information and resources to help you make informed financial decisions, including those about student loans.
• Edvisors: Provides in-depth information, advice and tools to help students plan and pay for college, including managing student loans.
• Federal Student Aid: U.S. Department of Education's hub for all federal student aid information.
• FinAid: A comprehensive source for student financial aid information, advice and tools.
• National Association of Consumer Advocates: Association of attorneys and advocates focusing on consumer issues, including student loans.
• National Consumer Law Center: Provides legal expertise to promote consumer rights, including those related to student loans.
• National Foundation for Credit Counseling: Offers financial education and certified counseling services, including for student loans.
• Student Borrower Protection Center: Advocacy group focused on alleviating student debt and influencing policy.
• Student Debt Relief: Offers information on student loan forgiveness programs, laws and other ways to manage student debt.
• Student Loan Planner: Offers consulting services and hosts a blog with free information on how to tackle student loan debt.
• The College Investor: Focuses on helping students get out of student loan debt and start investing for their future.
• The Institute of Student Loan Advisors: Offers free expert advice and affordable services for managing student loans.