Student Loan Debt
A student loan is very rarely dischargeable through bankruptcy. However, Chapter 7 bankruptcy can be extremely helpful in clearing up other debt so that student loan obligations can be met. By the same token, Chapter 13 bankruptcy can often be filed to alleviate the debt problems that make student loan obligations difficult to meet. A student loan payment can sometimes be maintained in the Chapter 13 reorganization, making it even easier to make the payments post-bankruptcy.
While student loans can rarely be discharged outright, it is helpful to understand how they are treated in bankruptcy. To discuss this with me personally, contact my office and set up a free consultation.
What is the standard for eliminating student loans?
The standard for determining whether a student loan is dischargeable (that is, "can it be eliminated?") is known as the Brunner test. It is a three-part standard that requires each of the following conditions to be met:
- Poverty: based on your current income and expenses, you cannot maintain a minimal living standard and repay the loan.
- Persistence of Hardship: your current financial condition is likely to continue indefinitely. or the situation is hopeless (or nearly hopeless). For instance, some type of permanent, severe disability that makes employment impossible.
- Good Faith Attempt To Repay: there must have been a good faith effort to maximize income and repay the loan.
This is a difficult standard to meet. The level of poverty and hardship required is quite severe. A temporary (or even long-term) inability to find employment will not be enough on its own, absent other factors. Temporary disability will not normally qualify an individual to have their student loans discharged, nor will long-term disability if employment is still possible.
The condition of poverty and hardship will need to be long-term, and there will need to be proof that employment providing a standard of living above the poverty level will be impossible for the foreseeable future. Unfortunately, poverty resulting from a bad economy or a poor job market will not be considered a "persistent hardship". As mentioned above, a long-term, debilitating, physical injury gives the best hope of success.
Finally, you must have made a "good faith" attempt to repay your student loans. What qualifies as "good faith" is always arguable, but it will help if you made at least some payments while employed.
Congress has chosen to greatly limit the ability of Americans to use the bankruptcy process to deal with student loan defaults. However, if you believe you meet these criteria, contact us and set up a free consultation to determine if your student loans can be eliminated through bankruptcy. While the standard is difficult to meet, it is worth exploring if your student loans have become unmanageable through no fault of your own.
Income based repayment program
A Federal program existing outside of bankruptcy, the Income Based Repayment Program requires an application that must be resubmitted every year and takes into account actual income and expenses. This program caps the amount of a Federal student loan repayment based on actual household earnings. Private student loans are not eligible.
At no point will your payment be higher than it would have been under a standard repayment plan, so there is very little to lose by applying and being accepted into the program. This option could lower a student loan payment by a significant amount and allow the borrower to meet other financial obligations. It can also be combined with the Public Service Loan Forgiveness Program (as discussed below) to cap your payment and limit your total number of payments, possibly saving qualifying borrowers a large amount of money.
The application may prove to be daunting for many people, and the program potentially could lengthen the period of you payment, but I will be happy to help you determine if this is an option to consider.
Public service loan forgiveness program
Do you work a full-time, public service job? If you do, it is possible you will qualify for the Public Service Loan Forgiveness Program. The program requires the following:
- You must work full-time (at least 30 hours per week) for a non-profit, qualifying, public service employer.
- You must make 120 on-time, full, scheduled, monthly payments (10 years of payments).
- Applies to Federal loans only.
You should strongly consider applying for this program if you have worked for a non-profit, public service employer. Once again, the program only applies to Federal loans. You must have a spotless repayment record, with no missed payments or gaps in your payment history. If you qualify, your remaining Federal student loan obligation could be completely forgiven.
The Public Service Loan Forgiveness Program can also be combined with the Income Based Repayment Program to maximize your ability to limit and repay your Federal student loans. The Income Based Repayment Program can be used to cap your repayment during the 10 years of repayments required under the Public Service Loan Forgiveness Program. Once those 10 years have expired, your remaining obligation could be forgiven.
Contact us to see if you meet all of the criteria for one or both of these programs. It could save you thousands (or many thousands) of dollars in student loan payments.
bankruptcy and your student loans
Student loans typically "pass through" a bankruptcy filing. That is, the student loans are unaffected by the filing. In a Chapter 13 bankruptcy, it is possible to maintain your student loan payment, though you are limited in how much can be committed to the payment. You can also obtain a deference and continue your payment after the bankruptcy is completed.
While in Chapter 7 bankruptcy, your student loans will continue to become due. You should continue to make payments if at all possible, as student loans don't go away, and could potentially lead to a wage garnishment (the Federal government can even garnish your Social Security!).
Student loans won't go away, so it is important to make sure the rest of your finances are in good order. If obligations on credit cards, medical bills, loans, and other unsecured debt are limiting your ability to pay your student loans, you should consider relief under the Bankruptcy Code.