Student loans are a necessary evil for most people. In order to get a good education after High School, you apply for scholarships, grants, and any other sort of financial aid available. If you are very lucky, you have a college fund set up and ready to pay for that fancy education. If you are not so lucky, you break down and take out a Student Loan.
Once you graduate, you are usually given a six month grace period to get a job and get on your feet. After that, you've got to start paying off that debt.
You should, of course, pay back the debt if you are able to do so. Student loan companies have hardship programs and payment rehabilitation programs available to you if you are struggling. You can even file for deferment or forbearance to take a break from payments for a short amount of time. If you have been faced with some unforeseen financial hardship, you may have to file bankruptcy to get you out of debt. But....
Can you file bankruptcy with student loans?
Student loans are difficult, but not impossible, to discharge in bankruptcy. To do so, you must show that payment of the debt “will impose an undue hardship on you and your dependents.”
Courts use different tests to evaluate whether a particular borrower has shown an undue hardship. A common test is the Brunner test which requires a showing that:
- The debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for the debtor and the debtor’s dependents if forced to repay the student loans
- Additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans
- The debtor has made good faith efforts to repay the loans. (Brunner v. New York State Higher Educ. Servs. Corp., 831 F. 2d 395 (2d Cir. 1987).
Assuming you can discharge your student loan debt by proving hardship, bankruptcy may be a good option for you. It is a good idea to first consult with a lawyer or other professional to understand other pros and cons associated with bankruptcy. For example, a bankruptcy can remain part of your credit history for ten years. There are costs associated with filing for bankruptcy as well as a number of procedural hurdles. There are also limits on how often you can file for bankruptcy.Whether a student loan is discharged based on hardship is not automatically determined in the bankruptcy process. You must file a petition (called an adversary proceeding) to get a determination.
If you already filed for bankruptcy, but did not request a determination of undue hardship, you may reopen your bankruptcy case at any time in order to file this proceeding. You should be able to do this without payment of an additional filing fee.
Bankruptcy with student loans should ALWAYS be a last resort!
If you are struggling with your debt payments but you are not ready to throw in the towel and file bankruptcy, you can get help in other ways.
Start by creating a budget for yourself. Once you track your spending for a month, using this Free Budget Spreadsheet, you will be able to see where you can make changes.
Next, explore other options to reduce your monthly payments. If you have outstanding debt that is not part of your student loans, there are programs available to help you reduce your monthly payments and interest. This can help you free up some money to put towards paying off those student loans!