Understanding Bankruptcy for Student Loans: A Comprehensive Guide
Struggling with student loan debt can be overwhelming, especially when it feels like there’s no way out. At O1ne Mortgage, we understand the financial burden that student loans can impose, and we’re here to help you navigate your options. If you’re considering bankruptcy as a solution, it’s essential to understand the process and alternatives available to you. For personalized assistance, call us at 213-732-3074.
Can You File Bankruptcy for Student Loans?
Yes, it is possible to include student loan debt in your bankruptcy filing, but it can be challenging. By law, bankruptcy trustees prioritize certain types of debts, such as child support, alimony, unpaid taxes, and criminal fines, over unsecured debts like student loans. While priority debts generally cannot be discharged, non-priority debts, including student loans, may be discharged if you can prove undue hardship.
Recent guidelines from the U.S. Department of Justice and the U.S. Department of Education aim to make the process fairer and more transparent, giving borrowers a better idea of whether they meet the criteria for discharge.
How to Get Student Loans Discharged in Bankruptcy
Filing for bankruptcy is a significant decision with long-term consequences. If you’ve exhausted all other relief options, it may be your only remaining choice. Here are the steps to get started:
1. Work With a Lawyer
While you can file for bankruptcy on your own, it’s advisable to enlist the help of an attorney. A lawyer can guide you through the process, help you maximize the effectiveness of the proceeding, and protect your consumer rights. Discuss your student loan debt with your attorney to gauge the possibility of getting it discharged.
2. Decide if You Will File Chapter 7 or Chapter 13 Bankruptcy
Both Chapter 7 and Chapter 13 bankruptcy can provide relief, but they differ in their approaches:
- Chapter 7: Known as liquidation bankruptcy, Chapter 7 involves selling some of your assets to pay off eligible debt, with any remaining debt being discharged. You’ll need to pass a means test to qualify, and the bankruptcy will remain on your credit report for 10 years.
- Chapter 13: Also called personal reorganization bankruptcy, Chapter 13 allows you to reorganize your debts to make affordable monthly payments over three to five years. Any remaining eligible debt will be discharged, and the bankruptcy will stay on your credit report for seven years.
Consult with your attorney to determine which option is best for your situation.
3. File an Adversary Proceeding
An adversary proceeding is a separate lawsuit within a bankruptcy case, specifically for your student loan debt. In this proceeding, you’ll request that the court find that keeping the debt would cause undue hardship for you and your dependents.
How to Prove Undue Hardship for Student Loans
Proving undue hardship is crucial for discharging student loans in bankruptcy. The criteria can vary by court, but two common tests are used:
Brunner Test
To pass the Brunner Test, you must meet all three of these criteria:
- Poverty: Continuing to make loan payments would prevent you from maintaining a minimal standard of living for yourself and your dependents.
- Persistence: Your financial situation is unlikely to improve for a significant portion of the repayment period.
- Good faith: You’ve made a good faith effort to repay your student debt.
Totality of the Circumstances Test
This test involves the court reviewing all relevant factors of your situation to determine if undue hardship exists. The decision is based on the information you provide.
Alternatives to Bankruptcy for Student Loans
If you don’t qualify for student loan discharge, consider these alternatives:
Income-Driven Repayment Plans
Federal loans offer up to four different income-driven repayment plans, reducing your monthly payment to a percentage of your discretionary income and extending the repayment term up to 25 years. Any remaining balance at the end of the term may be forgiven.
Deferment or Forbearance
If you’re facing temporary financial difficulties, you may qualify for deferment or forbearance, allowing you to pause your payments. Interest typically accrues during this period, but it can provide short-term relief.
Student Loan Forgiveness or Repayment Assistance
Depending on your career, you may qualify for programs like Public Service Loan Forgiveness (PSLF) or Teacher Loan Forgiveness. Some employers also offer student loan repayment assistance as a benefit.
Take Steps Early to Avoid Credit Damage
If you’re struggling to make your student loan payments, take proactive steps to avoid missing payments and defaulting, which can damage your credit score. Monitor your credit regularly to understand how your actions impact your score and to spot potential issues early.
At O1ne Mortgage, we’re here to help you navigate your financial challenges. For personalized mortgage services and advice, call us at 213-732-3074. Let us help you find the best path forward.
