Understanding How Bankruptcy Affects Student Loans
One common concern for many with financial struggles is the burden of student loans. One should recognize that discharging student loans through bankruptcy is a complicated process.
Quick Summary:
- To discharge student loans through bankruptcy is a complex process. It requires careful navigation of the legal landscape.
- Student loans are generally considered non-dischargeable debts. But specific circumstances may allow for discharge. Demonstrating “undue hardship” is an important aspect.
- Courts use tests such as the Brunner test to prove “undue hardship”. It considers factors like poverty, persistence of hardship, and good faith effort. There are other tests to look into this, which vary by jurisdiction.
- Repayment continues if there is no discharge of student loans. Potential consequences include interest accrual, collection efforts, credit score impact, and legal actions.
We will explore the topic of student loan bankruptcy in simple terms in this article. We hope this sheds light on the available options to help you navigate its complexities.
Are My Student Loans Included in Bankruptcy?
Filing for bankruptcy on student loans is complex and often challenging. Note that student loans are generally considered non-dischargeable debts. That means bankruptcy cannot eliminate it.
Yet, it is not impossible. Some circumstances may allow for the discharge of student loans under specific conditions.
How Can I Discharge My Student Loans?
You need to show “undue hardship” to pursue student loan discharge in bankruptcy. Undue hardship is proving that repaying the student loans would cause you and your dependents an undue and sustained financial hardship.
It is important to know that discharging student loans through bankruptcy is rare. The burden of proof is also high. Courts have a strict interpretation of “undue hardship”, and the process can be lengthy and expensive.
What Are Circumstances Under Which Student Loans May Be Discharged?
Discharging student loans in bankruptcy is generally challenging. But specific circumstances may allow for it. Note that criteria for discharge vary. Below are some specific circumstances where student loans may be discharged.
- Undue Hardship: The most common circumstance is proving “undue hardship.” A court may consider discharging the debt if the debtor can prove this. Meeting the criteria of tests like the Brunner test is crucial to prove undue hardship.
- Closed School Discharge: Debt discharge is possible if the borrower’s school closed down. It is also possible if they withdraw from the school.
- False Certification of Student Eligibility or Unauthorized Signature: A borrower is eligible for discharge if their signature was forged. It also applies if they were a victim of identity theft or the school faked their eligibility.
- Total and Permanent Disability Discharge: Disabled borrowers may qualify for discharge. Documentation from the Department of Veterans Affairs, the Social Security Administration, or a physician can prove their eligibility.
- Teacher Loan Forgiveness: Teachers working in low-income schools or educational service agencies may be eligible for loan forgiveness. They should also meet the specific qualifications.
- Public Service Loan Forgiveness (PSLF): Borrowers working in qualifying public service jobs and making 120 qualifying monthly payments under a qualifying repayment plan may be eligible for forgiveness of the remaining balance under PSLF.
Are There Different Student Loan Discharge Tests?
Courts use the Brunner test the most to decide if a debtor qualifies for a discharge due to undue hardship. But interpretation of undue hardship can vary by jurisdiction. Some courts may use different tests or factors. Here are some of the key tests:
Brunner Test
There are three test criteria to discharge student loans for undue hardship:
- Poverty: The debtor must prove they cannot maintain a minimal standard of living for themselves and their dependents while repaying the loans.
- Persistence of Hardship: The debtor must prove their current financial situation will persist for a significant part of the loan repayment period.
- Good Faith Effort: The debtor needs to show that they have made a good faith effort to repay the loans. They can explore alternative repayment plans or negotiate with the loan servicer.
Totality of the Circumstances Test
This test considers the circumstances of the debtor. It considers factors such as their income, expenses, and efforts to repay the loans. It gives courts more flexibility to consider a range of factors. This helps them determine undue hardship.
Johnson Test
This test considers whether the debtor’s financial situation will improve in the future. This improvement would make it possible for them to repay the loans without hardship. It focuses on the debtor’s prospects for increased income and improved financial stability.
Good Faith Test
Some courts may emphasize the debtor’s good faith efforts to repay the loans. This includes efforts to maximize income, cut expenses, and explore available repayment options.
Remember, recent case law may change how courts assess student loan discharge claims.
Are There Any Problems When My Student Loans Aren’t Discharged?
You must repay the debt as agreed in your loan. Here are some potential outcomes if there is no discharge to your student loans:
- Repayment Continues: You must continue making regular payments according to the agreed-upon terms. This includes adhering to the repayment schedule. It may involve monthly payments over an extended period.
- Accrual of Interest: Unpaid interest may continue to add on your student loans. That will increase the total amount you owe over time. You must understand the terms of your loan and how to calculate interest.
- Collection Efforts: Your loan servicer may start collection efforts if you fall behind on payments. This could include contacting you for payment. They could also report delinquencies to credit bureaus and assess late fees.
- Impact on Credit Score: Late or missed payments can impact your credit score. A lower credit score may affect your ability to secure credit for other financial needs, such as a home or car loan.
- Legal Consequences: Continued non-payment may lead to more severe consequences. The loan holder may take legal action. This could result in wage garnishment. That means there will be a deduction of part of your wages to repay the loan. Or, the seizure of tax refunds may occur.
- Loan Forgiveness Alternatives: You can explore alternative forgiveness programs. Some examples are income-driven repayment plans or PSLF. Those will still depend on your eligibility and circumstances.
It’s important to communicate with your loan servicer if you’re experiencing financial difficulties. They may offer options such as deferment, forbearance, or alternative repayment plans. These options help you manage your student loan debt.
Our Bankruptcy Lawyers are Ready to Serve You!
Remember, understanding your options is the first step toward financial relief. If you’re grappling with student loan debt, contact Miller & Miller Law, LLC. Don’t hesitate to ask for help from our bankruptcy attorneys.
We are here to provide advice, guidance, and legal support. You need it to navigate student loan bankruptcy. It helps you work toward a brighter financial future. Get a free case evaluation today!
