Most consumers facing bankruptcy also have student loans. With so much misinformation online on this topic, we cover the REAL facts about discharging student loans in bankruptcy. Under the current law, there are very few instances in which a debtor can use bankruptcy to discharge their student loans. It is also important to understand that it does not matter if you went to a college or a vocational school. A loan for “educational purposes” is all it takes.
Under the Bankruptcy Code, Congress created certain exceptions to discharge of debt. Student loans are specifically excepted from discharge under Sections 523(a)(8)(A)(ii) and 523(a)(8)(B):
(8) unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents, for—
(A)(i) an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or
(ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend; or
(B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual;
Most consumers in bankruptcy attempt to discharge their student loans under the “undue hardship” doctrine. The seminal undue hardship case is the 1987 case of Brunner v. New York State Higher Education Services Corp., 831 F.2d 395, Bankr. L. Rep. P 72,025 (2d Cir. 1987). The Northern District of Georgia (which is part of the 11th circuit) follows this case.
The Brunner court requires a three-part showing that:
(1) the debtor cannot maintain a minimal standard of living if forced to repay the loans
(2) the debtor’s disability is likely to persist for a significant period, and
(3) that the debtor has made good faith efforts to repay the loan.
Currently, at least here in the Northern District of Georgia, the problem facing debtors trying to discharge their student loans are proving:
- what is a minimal standard of living?
- how can a debtor prove that she has made a good faith effort to repay the loans? Does she need to apply to every program to reduce or repay loans? How many options does she need to research?
Chapter 7 and Student Loans
When you file Chapter 7, even though you are required to list your student loans on your petition this does not mean they will be discharged. If you want to attempt to discharge these loans then you will need to file a Complaint to Determine Dischargeability of Student Loan Debt. Filing this complaint is extremely expensive to file and pursue in court and in the majority of cases, the court will deny these motions. Until the bankruptcy code is updated, this will most likely continue. If you are filing Chapter 7 just to discharge student loans then you should think twice.
Chapter 13 and Student Loans
If you file for Chapter 13 bankruptcy then you have the choice to either pay the student loans back through your case or allow the loan to be deferred while you are in your case. Of course the interest will still accrue on the loans if you decide to defer the loans. For most of our clients, it would make their trustee payment too high if they tried to cram in their student loan repayment over the 5 year plan. Most clients opt to defer the loan with the bankruptcy filing but then work out a repayment plan directly with the student loan creditor on their own terms during their case.
Resources for Student Loan Repayment and Assistance: Federal Student Loans
Below are the federal student loan repayment options.
- If you want to pay less interest: You make equal monthly payments for 10 years. If you can afford the standard plan, you’ll pay less in interest and pay off your loans faster than you would on other federal repayment plans.
- How to enroll in this plan: You’re automatically placed in the standard plan when you enter repayment.
- If you need lower payments: income-driven repayment. The government offers four income-driven repayment plans: income-based repayment, income-contingent repayment, Pay As You Earn (PAYE) and Revised Pay as You Earn (REPAYE). These options are best if your income is too low to afford the standard payment. Income-driven plans set monthly payments between 10% and 20% of your discretionary income. Payments can be as small as $0 and can change annually. Income-driven plans extend your loan term to 20 or 25 years. At the end of that term, any remaining loan balance will be forgiven — but you pay taxes on the forgiven amount.
- How to enroll in these plans: You can apply for income-driven repayment with your student loan servicer or at studentloans.gov. When you apply, you can choose which plan you want or opt for the lowest payment.
- If you qualify for student loan forgiveness: income-driven repayment. Public Service Loan Forgiveness is a federal program available to government and certain nonprofit employees. If you’re eligible, your remaining loan balance could be forgiven tax-free after you make 120 qualifying loan payments. Only payments made under the standard repayment plan or an income-driven repayment plan qualify for PSLF. To benefit, you need to make most of the 120 payments on an income-driven plan. On the standard plan, you would pay off the loan before it’s eligible for forgiveness.
- How to enroll in these plans: You can apply for income-driven repayment with your servicer or at studentloans.gov.
Resources for Student Loan Repayment and Assistance: Private Student Loans
Unfortunately, if you have a private student loan then you can either seek a repayment assistance plan offered by that specific company (which they may or may not offer). While some lenders do have programs in place to offer income dependent repayment plans, not all do (nor are they required).