Can You Declare Bankruptcy if You Owe Money on your Student Loans?
It is not impossible, but it is difficult to discharge your student debts via bankruptcy.
When student loan payments become too much to bear, declaring bankruptcy to discharge your debts entirely may seem like the best choice. You would be free of that huge amount of debt if you filed for bankruptcy.
However, declaring bankruptcy in any circumstance is a major financial decision usually made as a last resort. Bankruptcy is damaging to your credit since it remains on your record for seven to ten years. When it comes to paying off your college debts, it’s even more challenging.
“The overwhelming majority of the time, we’ve had customers try to obtain a bankruptcy discharge on federal student loans, but they’re unsuccessful,” says Travis Hornsby, creator of Student Loan Planner. “Your prospects are low if your income is over the poverty level and you don’t have a chronic impairment.”
It’s difficult to declare bankruptcy on your student debts
To file for bankruptcy on student loans, debtors must pass a multi-part test demonstrating that they would never be able to repay the amount. In addition, they must show that paying back their student loans will put them in “undue hardship.”
“Because Congress didn’t define ‘undue hardship,’ the courts were left to judge,” says higher education expert Mark Kantrowitz. As a result, courts utilize the Brunner Test to determine whether a borrower is eligible for student debt discharge via bankruptcy. A borrower must prove the following via the Brunner Test:
- a current incapacity to pay back the loan while sustaining a basic level of life;
- There’s a good chance that these conditions will last for the duration of the loan’s regular payback period; and
- A sincere attempt to repay the debts utilizing financial relief alternatives such as deferments, forbearances, and income-driven payback
How can you show “undue hardship”?
“Student debt discharge via bankruptcy is very uncommon, but not impossible,” Kantrowitz says.
According to Kantrowitz, debtors have been able to show “undue hardship” in the following situations:
- Even though the borrower is handicapped, the private student loan does not provide a disability discharge.
- The borrower has a handicapped dependant who makes it difficult for the borrower to work full-time while caring for the dependent or the expense of caring for the dependent results in a higher minimum standard of living.
- The borrower has a very low income and few opportunities to increase it.
- Alimony and child support responsibilities decrease a borrower’s net income, making it difficult to maintain a basic living level while repaying student loan debt.
- The borrower’s cost of living is high due to where they live (New York City, Los Angeles, San Francisco, Boston), which has an impact on the minimum standard of living criterion.
- The college diploma was useless, and the borrower is unable to repay the loan because of it.
- The amount of debt owed is high in comparison to the borrower’s income, making repayment difficult. A grandmother, for example, cosigned a private student debt for a grandchild and is now retired and living on a limited income.
Before filing for bankruptcy, consider your choices
Obtaining a bankruptcy discharge of your student debts is difficult, but alternative options are available to desperate borrowers before resorting to this last-ditch attempt.
“If our clients can’t show that they have no chance of repaying the loan,” Hornsby says, “then the Department of Education typically replies by asking the borrower to join in an income-based repayment plan.”
Repayment arrangements based on federal income Based on any changes in your income, adjust your monthly cost. As a result, your monthly student loan payment reflects how much you can afford to pay.
Pay As You Earn (PAYE) and Revised Pay As You Earn (RPAE) are two income-driven repayment schemes recommended by Hornsby (REPAYE). Your credit score won’t be destroyed as it would be in bankruptcy, and you’ll just have to pay 10% of your discretionary income with these programs. Any leftover amount is forgiven after the payback term.
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