Can You Get Out of Student Loan Debt Through Bankruptcy?
Student loan debt has become a major financial burden for millions of people across the globe, particularly in the United States. For many, student loans are the largest form of debt they carry, and the pressure of repaying them can feel overwhelming. If you’re struggling with student loan debt, you might wonder if bankruptcy offers a way to discharge these loans and relieve some of the financial stress. The question, “Can you get out of student loan debt through bankruptcy?” is a common one, and unfortunately, the answer isn’t as simple as a yes or no.
In this article, we will explore whether it’s possible to discharge student loan debt through bankruptcy, the legal requirements involved, and what other options you may have if you’re struggling to pay your student loans.
The General Rule: Student Loan Debt and Bankruptcy
Under normal circumstances, student loan debt is not dischargeable in bankruptcy. This means that if you file for bankruptcy, your student loans will typically remain intact, and you will still be responsible for paying them. This rule is in place because student loans are considered a type of non-dischargeable debt in the U.S. bankruptcy system.
The U.S. Bankruptcy Code, which governs the rules surrounding bankruptcy, includes an exemption that prevents the discharge of student loans except in specific cases. This means that, in most bankruptcy filings, student loans will survive the process. As a result, declaring bankruptcy generally will not provide a way to completely eliminate or erase student loan debt.
The “Undue Hardship” Exception
Although student loans are generally protected from discharge in bankruptcy, there is an exception. Under certain circumstances, student loans can be discharged if the borrower can demonstrate that repaying the loans would cause an “undue hardship.”
The undue hardship exception is not automatic, and it’s up to the bankruptcy court to decide whether the borrower qualifies. To determine if student loan debt causes undue hardship, the court uses a three-part test, often referred to as the Brunner Test. This test is used in most jurisdictions, although some courts may apply different tests.
The Brunner Test examines the following:
- The borrower’s current income and expenses: The court will look at the borrower’s income and expenses to determine if they can maintain a basic standard of living while repaying the student loans. If the borrower’s income is so low that they cannot afford basic necessities (food, housing, clothing, etc.) while making student loan payments, this may be an indicator of undue hardship.
- The borrower’s future ability to pay: The court will consider whether the borrower’s financial situation is likely to improve in the future. If the borrower can demonstrate that their financial situation is unlikely to improve, even with future efforts (such as finding a better-paying job), this may support a finding of undue hardship.
- The borrower’s good faith efforts to repay the loans: The court will also examine whether the borrower has made a good faith effort to repay the student loans. If the borrower has made consistent payments or attempted to negotiate with the loan servicer, this may show that they are genuinely trying to repay the debt but are unable to due to extenuating circumstances.
If the borrower can prove all three parts of the Brunner Test, the court may grant a discharge of their student loans, eliminating the debt in the bankruptcy process. However, this is a difficult standard to meet. Bankruptcy courts are typically reluctant to discharge student loans, and only a small percentage of borrowers are successful in demonstrating undue hardship.
What Are the Chances of Success?
The chances of successfully discharging student loan debt through bankruptcy depend on several factors, including:
- The jurisdiction: Different bankruptcy courts across the United States may apply the Brunner Test differently, and some may be more lenient than others. However, most courts adhere to the three-prong test and are generally strict when it comes to discharging student loans.
- The borrower’s circumstances: The financial hardship that the borrower faces plays a significant role in determining whether the court grants a discharge. If the borrower can show that they cannot afford even a minimal standard of living while paying their loans, and that their financial situation is unlikely to improve in the foreseeable future, they may have a better chance of success.
- The borrower’s past repayment efforts: Courts will also consider whether the borrower has made a good faith effort to repay their student loans. If the borrower has consistently tried to pay off the debt, even if their payments were minimal, this could indicate that they are serious about repaying the loan. On the other hand, if the borrower has made no effort to pay and has defaulted on the loans, the court may be less inclined to grant a discharge.
Given these factors, most people who file for bankruptcy are not able to discharge their student loan debt. It’s important to understand that student loan debt is treated differently from other forms of debt in bankruptcy, such as credit card debt, medical bills, or personal loans, all of which can generally be eliminated through bankruptcy proceedings.
What Happens If Bankruptcy Does Not Discharge Student Loan Debt?
If you are unsuccessful in discharging your student loans through bankruptcy, your student loans will remain in place after the bankruptcy proceedings. However, that doesn’t mean you’re stuck with your loans forever. Even if you cannot get rid of your student loans through bankruptcy, there are other strategies you can use to manage your debt.
Here are some options to consider:
1. Income-Driven Repayment Plans
Income-driven repayment plans are designed to make student loan payments more manageable by tying your monthly payments to your income. Under these plans, your payment amount may be reduced based on your income, and after a certain number of years of qualifying payments, your loan balance may be forgiven.
2. Loan Consolidation or Refinancing
If you have multiple student loans, consolidating them into one loan may help simplify your repayment process. Consolidating loans can also lower your interest rate or give you a longer repayment term, making your monthly payments more affordable. Refinancing may be an option as well if you qualify for better terms, though it may not be available to borrowers with poor credit or income.
3. Deferment or Forbearance
If you are experiencing a temporary financial hardship, you may be able to temporarily pause your student loan payments through deferment or forbearance. These options allow you to suspend payments for a period of time, though interest may continue to accrue during the suspension.
4. Public Service Loan Forgiveness (PSLF)
If you work in certain qualifying public service jobs, you may be eligible for Public Service Loan Forgiveness (PSLF). PSLF is a program that offers loan forgiveness after you make 120 qualifying monthly payments while working for a qualifying employer, such as a government agency or nonprofit organization.
Conclusion
In most cases, student loan debt cannot be discharged through bankruptcy. The undue hardship exception exists, but it is very difficult to meet the legal requirements of the Brunner Test. If you’re struggling with student loan debt, bankruptcy may not be the solution, but there are several alternatives, such as income-driven repayment plans, loan consolidation, and Public Service Loan Forgiveness, that may provide relief.
If you are considering bankruptcy due to student loan debt, it’s essential to consult with a bankruptcy attorney who specializes in student loans. They can help you understand your options, evaluate your financial situation, and guide you toward the best possible solution for your circumstances. Ultimately, while bankruptcy is an option for discharging some debts, student loan debt remains a challenging obstacle that requires careful planning and persistence to overcome.