If you’re facing a mountain of student loan debt you feel you can hardly surmount, the thought of bankruptcy has probably crossed your mind before. Carrying this type of debt can sometimes feel as though there’s no way to move forward in life until the entire balance is demolished one way or another. But can student loans be discharged through bankruptcy? The short answer is: Usually no, but ultimately it depends. Here’s why.
Can Student Loans Be Discharged Through Bankruptcy?
Bankruptcy can sound an awful lot like a magic wand, but actually requires a great deal of time and effort, and even money, to attempt. In the case of declaring bankruptcy on student loans, the situation is made even more difficult.
Student loans are notoriously difficult to discharge through bankruptcy. The only way someone even has a chance of doing so is if they can prove one very important thing: Undue Hardship.
According to Federal Student Aid, “you may have your federal student loan discharged in bankruptcy only if you file a separate action, known as an ‘adversary proceeding,’ requesting the bankruptcy court find repayment would impose undue hardship on you and your dependents.”
In other words, you can’t just have these loans removed because you’re having difficulty repaying them. The act of repaying them would have to be proven to be almost completely unreasonable and beyond your realm of possibility.
Federal Student Aid goes on to explain what factors are used to determine undue hardship. The first factor is that “you would not be able to maintain a minimal standard of living,” if you had to repay your loans. You would also have to show that your situation isn’t a temporary one and that you’ve made true efforts to pay on your loans.
If your attempt to file bankruptcy on your federal student loans doesn’t work, there’s still hope of relief. The courts could still partially discharge your federal student loans. In fact, there are multiple types of personal bankruptcy: Chapter 7 and Chapter 13. Chapter 7 can potentially remove all of your consumer debt, but Chapter 13, which is considered a “reorganization” of debt, discharges a portion of it. If you’re unable to do either, the courts could possibly help you receive a lower interest rate, which will lower your payment.
Income-driven Repayment Plans, Forbearance, and Deferment: An Alternative to Filing Bankruptcy on Your Student Loans
Bankruptcy isn’t your only option if you’re struggling to repay your student loans. In fact, you might find that you don’t need to spend the time and money on bankruptcy for your student loans at all, thanks to income-driven repayment plans. Income-driven repayment plans apply only to federal student loans. These plans limit the amount you owe each month to a certain percentage of your income. Since the amount you owe is based on your income, there could even be a scenario in which you owe nothing at all.
There are four income-driven repayment plans. The one you’d apply for depends on when you took out your student loans, as well as what type of student loans you have. You can find out more about these plans here, and you can apply for them here.
Not only can income-driven repayment plans lower your student loan payment, but they can also make you eligible for student loan forgiveness. All you have to do is make sure you reapply each year (which is a requirement) and make every payment in full and on time. After a certain number of consecutive payments (which will depend on the plan you’re on), you can apply to have the remainder of your debt forgiven.
There’s also the option to apply for forbearance or deferment on federal student loans. Both of these temporarily pause your payments, though you might still be responsible for interest that accrues during the break.
If you’re a private student loan borrower, you can see if your lender offers forbearance or deferment. You can also review their website to see other options they might have, such as their own hardship programs. What’s available will vary per lender.
Don’t Give Up Hope
As student loan debt — and student loan default rates — continue to grow, those in the know are working to find solutions. US News reported that new legislation has been proposed to better define “undue hardship,” and potentially make more borrowers eligible to fall under that criteria. US News also reported that the Department of Education, “has expressed concerns that the undue hardship standard in its present form is discouraging borrowers from filing for bankruptcy,” and has requested data to investigate the matter further.
Given that there appears to be no ebb in the tide of student loan debt in the years to come, new legislation to aid underwater borrowers could continue to arise.
Therefore, if you feel as if you lost all hope, don’t give up. Keep researching this topic as time goes on, and talk to a lawyer if you feel like you do want to try to file for bankruptcy on your student loans. Even if you don’t pass the “undue hardship” criteria today, you can try again if your situation changes.