Summary: Bankruptcy does not discharge student loan debt, but it may help you free up funds to focus on your loans. You can file a lawsuit requesting student loans be discharged if you qualify. There is also help available outside of bankruptcy.
Can Bankruptcy Get Rid of My Student Loans?
Bankruptcy does not generally discharge student loans. You can file an adversary proceeding to try, but the standard is very high. One strategy is to use bankruptcy to discharge other debt so you’ll have more money available to pay off your student loans. If the main debt problem is a student loan, bankruptcy may help, but I usually recommend pursuing non-bankruptcy options.
What are bankruptcy options for getting rid of student loan debt?
File bankruptcy and a separate lawsuit within the bankruptcy requesting the student loans be discharged.
To get rid of student loans without paying them, you must bring a separate lawsuit requesting discharge for hardship. You must prove that you have no way of paying back the student loans in your lifetime. To prove hardship, you must show:
- You can’t maintain a “minimal” standard of living if forced to repay the student loan
- You won’t be able to repay the student loan in the future
- You made a good faith effort to repay the student loan
This means more than showing tight finances. The income-based programs now available now allow low to no payment and then forgiveness after a certain number of years. This makes it tougher to show that you can’t maintain your “minimal” standard of living and pay the loan.
File Chapter 7 bankruptcy and reduce other debt
Chapter 7 bankruptcy may eliminate credit card, signature loans, medical bills, etc. This may free up enough cash to allow you to pay your student loan.
File Chapter 13 bankruptcy and pay back what you can afford in Chapter 13 bankruptcy
In Chapter 13 bankruptcy, the way a student loan is handled varies. Here are some of the ways:
- Student loan gets paid the same as creditors, signature loans, etc. Unfortunately, interest continues to run but you don’t pay the student loan. You pay the trustee your plan payment and if the plan payment is big enough, the student loan creditor will get its share of some money. But this is like putting a bandaid on the problem. The student loan is not discharged (forgiven) at the end of the bankruptcy like the credit cards, etc.
- Pay the student loan directly. This is usually only allowed (in the Eastern District) where all your debt is being paid back, but there are some exceptions.
In most cases, at the end of the bankruptcy, the borrower will still owe the student loan with interest. However, the bankruptcy does keep the student loan lender from assessing penalties or collection costs while the bankruptcy is pending. In some circumstances, a Chapter 13 bankruptcy may help. If the student loan payment is too large to handle, a Chapter 13 bankruptcy may lower the person’s overall debt payments enabling the individual to live and meet basic bills while in bankruptcy. But there are many repayment programs available for federal loans. Again, the problem is that without a hardship discharge, the student loan doesn’t go away and grows in bankruptcy. If a debtor’s main problem is federal student loans, the first thing to look at is repayment options.
How do I find help on student loans without filing bankruptcy?
What help can I get if I am disabled?
If you are on social security or a disabled veteran, you may be able to get an administrative discharge if you have a federal loan.
What are my repayment options?
The options available for repaying or otherwise obtaining relief from student loans vary widely depending on whether the loan is public or private, the current status of the loan (whether or not the loan is in default), and the amount owed. You may also qualify for special relief in certain programs such as Public Servant Forgiveness.
There is a maze of options and criteria. The first step is to determine what options are available. Some of the available options include:
Federal Loans
Standard Repayment – This repayment option is a fixed monthly payment based on a 10-year repayment term. The payment term can be shorter, however, as the minimum payment under this plan is $50 per month. Eligible loans are Direct Loans, Stafford Loans, and all PLUS loans.
Graduated Repayment – The plan differs from the Standard plan in that payments are lower at first, and gradually increase, usually every two years. The idea is that the borrower will get better, higher-paying jobs or raises as more time goes on. The term of repayment is 10 years. Total interest is higher than the Standard plan. Eligible loans are Direct Loans, Stafford loans, and all PLUS loans.
Extended Repayment – This can be similar to both the standard and graduated. Essentially, it takes either the Standard or Graduated plan, and extends the time to between 12 and 25 years, depending on the balance. In other words, the borrower can extend the time to pay and choose either fixed payments or graduated payments. In addition to some other qualifications, a borrower must have more than $30,000 in Direct or FFEL loans to qualify. Eligible loans are Direct Loans, Stafford Loans, and all PLUS loans.
Income-Based Repayment (IBR) – This plan is perhaps the most relief-giving. The maximum monthly payment will be 15% of discretionary income above 150% of the poverty level. Discretionary income is defined as the difference between the adjusted gross income (AGI from the tax return) and 150% of the poverty level for the household size and state of residence. Payments go up and down as income goes up and down. The remarkable part of this plan is that after 25 years of income-based repayments (10 if the borrower works for a qualified institution, like a public school), the loan balance and any accrued interest are forgiven. Eligible loans are Direct Loans, Stafford Loans, all PLUS loans, and Consolidation loans that do not include loans made to parents. The forgiven portion could be taxable.
Pay As You Earn Repayment (The New IBR) – There have been several legislative actions, including the Health Care and Education Reconciliation Act of 2010, that essentially modified IBR from 15% to 10% of discretionary income and shortened the forgiveness period from 25 years to 20 years. Eligible borrowers are those that were new borrowers on or after October 1, 2007, and must have received a disbursement of a Direct Loan on or after October 1, 2011. Eligible loans are Direct Loans, Direct PLUS loans made to students, Direct Consolidation loans that do not include loans made to parents.
Income-Contingent Repayment (ICR) – This is perhaps one of the most confusing payment plan. This plan using an extremely complex formula that inputs variables like income, family size, and loan balance, and spits out a term and payment amount. Like IBR, after 25 years of ICR payments, the loan balance and interest are forgiven but could be taxable. Eligible loans are Direct Loans, Direct PLUS loans made to students, and Direct Consolidation loans.
Income-Sensitive Repayment (ISR) – This payment plan is an alternative to ICR for FFEL lenders can offer borrows ISR, which links payments to income. The loan term is 10 years. Eligible loans are Stafford Loans, FFEL PLUS loans, and FFEL consolidation loans.
Perkins Loans
Check with the lending school for repayment options available. If a Perkins loan is consolidated, then some of the above options may be available, such as Income-Based Repayment.
Private Loans
There are no special repayment options for private student loans. There are two options: pay according to the terms of the note or don’t. When a private loan is taken out, the repayment terms will be listed in the promissory note. If the borrower fails to perform according to this contract, then the lender has remedies provided by state law. Most often, this includes getting sued.
If a borrower is sued and the lender obtains a judgment, the lender could levy bank accounts and attempt to take any unexempt property.
What do I do if my student loan is in default?
Understanding default is important. Federal student loans are perhaps one of the most dangerous types of debt on which to default. It ranks with taxes or child support in regards to the reach of the creditor. They have special rules and regulations that allow them much more power than “regular” debts like credit cards or medical bills.
The first day the loan payment is past due, the loan is considered delinquent. After 90 days of delinquency, the loan servicer will begin to report to the credit bureaus of the delinquency. After 270 days of delinquency, the loan will be declared to be in default.
Possible Consequences of Default
The entire balance of the loan becomes due.
The borrower loses the “benefits” of the federal loan repayment options, forbearance, and loan deferments.
- The borrower can not borrow any more student loans
- Tax refunds can be withheld to pay on the loan
- Fees, penalties, and interest begin to stack up
- The borrower’s wages can be garnished
- The lender can take legal action
Curing default
The Department of Education offers extensive information regarding rehabilitating a student loan including:
Loan repayment – One option, obviously, is to pay the loan balance in full. As if this was actually an affordable option!
Loan rehabilitation – Essentially, rehabilitation is a “trial period” that is agreed upon by the borrower and the lender. The borrower will make payments that are deemed “reasonable and affordable” for a selected period of time. Once the timely rehabilitation payments have been made, the default status will be removed. Eligibility of benefits return such as repayment options, forbearance, loan forgiveness, and borrowing more student loans.
Consolidation – A defaulted loan can be cured through consolidation, if eligible. The defaulted loan is paid off by a new consolidation loan. Eligibility, among other things, included requiring the borrower to pay several voluntary, on-time payments consecutively. Usually, three payments are required prior to the consolidation loan being issued.
Student loan resources that may help you
Figure out what type of student loan you have.
When exploring options for repayment or relief, the first step is to understand and know what type of loans the student or parent took out. There are two main ways the student can figure out what type of loan they have. Look up the loan on the National Student Loan Data System. If it is found here, then it is a federal loan.
Find the loan documentation. The promissory note will name the federal loan program at the top (Stafford, PLUS, FFEL, William D. Ford Direct Loan Program, etc.) The student or parent may also be able to find this information on the monthly bill or contract. It’s possible that the school may assist with obtaining this information as well. If the loan is not a federal loan, then that leaves only one option–a private loan.
Helpful websites:
Student Loan Borrower Assistance – a great website for walking you through options provided by the National Consumer Law Center
National Consumer Law Center Student Loan Project – helps you work through various options for resolving student loan issues.
Repayment calculator – US Department of Education calculator to run figures on different repayment options.
Cross Stone Law is not accepting student loan resolution cases. There are law firms that specialize in student loans that you should seek out. If you believe bankruptcy may help your situation, contact us.