Depending on your circumstances, you might be able to wipe out your student loans in bankruptcy. However, the undue hardship test that the court will use to assess your case isn’t easy to meet. Some facts that have satisfied the standard involved unemployment, low income, medical issues, and mental illness, all of which were expected to continue indefinitely.
When you file bankruptcy, the court won’t automatically assess whether you’re entitled to wipe out your student loans. If you’d like to try to rid yourself of your student debt, you (or your attorney) will have to file an adversary proceeding (a lawsuit) in the bankruptcy case against the student loan lender.
The case will proceed in the same way that any other trial would move through the court. You’ll request a student loan discharge in your complaint (the paperwork that initiates the suit), and you’ll have to present evidence proving that you’re facing an undue hardship that is unlikely to change in the future, among other things (more on that below).
As with any litigation, it can be expensive, and there will be no guarantee that you’ll win. You should talk with your attorney about the amount that you owe and how your local court has decided similar cases in your area. Together you can decide whether it makes sense for you to move forward.
What Is an Undue Hardship?
Before you can wipe out your student loan, you’ll have to demonstrate that it’s unlikely that you’ll be able to pay it in the future. Most courts use the undue hardship test (also called the Brunner test) to determine the dischargeability of both private and federal loans.
Under the test, you’ll have to prove that:
- You can’t repay the loan and maintain a minimum standard of living for you and your family.
- Your financial situation is unlikely to change.
- You tried to repay your loans.
You might have an easier time proving your case if you’re facing a large monthly payment and your private student loan provider doesn’t provide an income-dependent repayment program. Additionally, you might have other ways to challenge your student loan. For instance, it might be dischargeable if:
- your school wasn’t an eligible education institution (check the Department of Education list)
- the loan was for something other than a “qualified higher education expense,” or
- the school had gone out of business before you finished your program.
Again, it’s important to speak with a knowledgeable bankruptcy attorney about how the court has decided cases in your area, as well as other defenses you might be able to raise.
If you don’t think that you can get rid of your loan in a Chapter 7 bankruptcy, you might find it helpful to file for Chapter 13 bankruptcy. You’ll likely be able to pay your most important debt, such as your house and car payment, domestic support obligations, and taxes, while paying little, if anything, on credit card balances and your student loans. After your three- to five-year plan ends, you should have less debt and be in a better position to repay your student loan.
Additionally, a private student loan isn’t much different than any other unsecured (uncollateralized) loan. You can try lowering the interest rate or extending the repayment period through refinancing. Because a lender will look at your credit score and employment history, it’s a good idea to do so before you get behind on your payments.
Also, you can try to negotiate a settlement with your private student loan lender. You can do this yourself, or by working with a debt settlement company for a fee. Usually, you’ll offer a lump sum of money now, which might be more appealing to the lender than a stream of payments over time. Just remember, settling a private student loan can result in you owing income tax on the forgiven amount, so talk to a tax professional first.
Finally, consider talking with your lender about any programs that might help you during a rough time.
Questions for Your Attorney
- What are my chances of discharging my private student loans in a bankruptcy?
- How much will you charge me to litigate my dischargeability case in bankruptcy?
- Do I have other options to deal with my student loan debt?