Can I File for Bankruptcy If I Have Student Loans

Student loan debt won't stop you from filing for bankruptcy, but you'll likely still owe it afterward.

You can file for bankruptcy if you have a student loan; however, most people won’t be able to wipe out student loan debt. Even so, bankruptcy can provide relief in other ways. For instance, a Chapter 7 filing can get rid of qualifying debt, such as credit card balances, medical bills, and personal loans, leaving you with more money to make your monthly student loan payment. Or, in a Chapter 13 repayment plan, you might be able to pay a smaller amount towards your student loan for three to five years.

Bankruptcy Stops Student Loan Collections

Both Chapter 7 and Chapter 13 bankruptcy will give you some relief from student loan payments as soon as you file. In both cases, an order called the automatic stay will stop:

  • phone calls and demand letters
  • wage garnishments, and
  • lawsuits.

Also, you either won’t need to make your student loan while you're in bankruptcy or you’ll pay less than you normally do, depending on the bankruptcy chapter that you file.

  • Chapter 7 bankruptcy. You don’t make creditor payments in this bankruptcy type. Instead, your payments will stop after you file. After completing your case—usually, about four to six months—the government or private lender will be free to continue collection actions. To get your loans discharged (wiped out), you’ll have to file a successful lawsuit in the bankruptcy court (more below).
  • Chapter 13 bankruptcy. A Chapter 13 case will last 36 to 60 months, during which time you’ll make payments according to a plan you’ve proposed to the court. The Chapter 13 plan cannot be limited to managing just your student loans. You must include all of your debts. Your student loans will get treated like any other nonpriority unsecured debt, like credit cards and medical bills. All nonpriority unsecured creditors will share a portion of your disposable income. In many cases, these creditors get very little money each month, if anything. At the end of your plan, you’ll receive a discharge of your nonpriority unsecured debt, except for the student loans (and possibly a few others), which you’ll continue to owe.

Example. Suppose that you have a $50,000 student loan with a monthly payment of $300. You also have three credit cards, totaling $15,000. In a Chapter 13 case, you’ll provide the court with a list of your expenses and a breakdown of your income. From that, a calculation will determine how much disposable income you have for a plan payment. If your disposable income is $200 per month, you’ll pay a total of $12,000 over five years. The bankruptcy trustee who administers your case will receive about $1,000 of that, leaving $11,000 for your creditors to split. They will be paid a pro rata share, giving your student loan creditor about 75%, or $150 per month, and the remaining creditors about $15 each.

Getting Rid of a Student Loan

Wiping out a student loan in a bankruptcy case isn’t easy. You must successfully petition the court to discharge it, and historically, that’s been a difficult hurdle to overcome.

In most courts, you’ll have to prove that paying your student loans would create an undue hardship. Unfortunately, the bankruptcy code does not define what an undue hardship is, so the courts over the years have attempted to articulate a definition.

Some courts require that you prove a “certainty of hopelessness.” Another popular approach is the Bruner test which looks at the following factors:

  • You would not be able to maintain a minimal standard of living if you had to repay the loan.
  • Your financial difficulties are expected to last for a significant portion of your repayment period.
  • You’ve tried to keep with your payments before filing bankruptcy.

It’s believed that very few debtors can prove the level of hardship most courts require unless a permanent disability exists. Courts in different areas approach the standards differently, so you’ll likely want to consult with a local bankruptcy attorney.

The Balance After Your Case Ends

If you don’t file a successful petition to discharge your student loan, you’ll continue to owe it after the case is completed. Your lender will credit any payments made in a Chapter 13 case through your payment plan to your balance.

Other Ways to Manage a Student Loan Payment

For government guaranteed loans, if you qualify for an income-driven repayment plan, you could significantly reduce your payments and eventually have some of the balance forgiven (usually after 25 years). You’ll be required to apply for the program, and your loan servicer will consider whether your income meets program guidelines. If it does, the loan servicer will offer you a reduced payment amount, or, if your income is sufficiently low enough, you might not have any payment at all.

Income-driven repayment plans are renewable yearly, which means that you’ll reapply each year and provide proof of income. Your payment could increase or decrease depending on your income for the prior year.

If you have a private student loan (the federal Department of Education or a state agency didn’t guarantee your loan), you’ll have to negotiate directly with the lender or servicer. Some might have programs in place to help you with an affordable payment.

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