Student Loans and Bankruptcy: What You Need to Know

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You may have heard somewhere that student loans cannot be repaid in bankruptcy, but this is a myth. It’s very difficult so far …

You may have heard somewhere that student loans is not subject to decomposition in a bankruptcy case, but this is a myth. While very difficult to do, it is possible and you may want to consider this option if you have exhausted all other options and meet the discharge criteria. Here’s what you need to know if you’re wondering how to file student loan bankruptcy.

First of all, if you are feeling overwhelmed with student loan payments or having trouble making ends meet, it is incredibly important to understand and use all the options available to pay off your student loan debt in the first place. Filing for bankruptcy can have huge long-term implications for your ability to access credit and can be costly, so it should only be used by individuals whose finances have completely collapsed and have no other options.

[Read: How to Pay Off Student Loans.]

Read the answers to common questions on this topic.

Do I have to file for bankruptcy?

If you are struggling to afford your monthly student loan payment, you should first contact your loan agent and ask about repayment plans and other ways to maintain a good reputation for loans. Loans service your student loan account management, including billing and repayment, and is staffed with people who can help you find the right solution for your situation.

if you have private student loansRepayment terms may vary, but it is best to start by contacting the support staff.

Many stranded borrowers find misleading information online or fall prey to predatory companies that claim to provide debt relief, so it’s important to work directly with student loan support to get this kind of help.

One of the bankruptcy avoidance options for federal student loan borrowers is to sign up for one of four income-based repayment plans that base the monthly payment on income and family size and can bring that amount down to zero.

[Read: What to Know About Federal Student Loan Repayment Options.]

Other options to avoid bankruptcy include: reprieve or patience, which are short-term solutions that allow you to temporarily stop your federal student loan payments or reduce the amount you pay each month. You may be eligible if you are experiencing financial difficulties, significant medical expenses, a job change, or other difficulty. And even if your federal student loans have already been paid off, you can look into credit recovery and loan consolidation.

If you have tried all the options available to you, but paying your student loans still prevents you from securing the essentials, you should consult with a lawyer who has experience with student loans in bankruptcy. Trustworthy organizations like the National Consumer Protection Center can also be a good source of information on bankruptcy procedures and understanding your rights as a student loan borrower.

Can my student loans be repaid in the event of bankruptcy?

For your federal student loans to be repaid through bankruptcy, you will need to prove that repaying them will cause “undue hardship.” There is no standard definition of undue difficulty and each situation is left to the discretion of each bankruptcy court. This can make it difficult to know if your loans will be paid off, but it also gives the judges the flexibility to consider each individual situation when making a decision.

Most courts use a set of criteria, known as the Brunner test, to determine whether paying off a student loan will cause undue difficulty. To pass the Brunner test, you must prove that you meet the following three criteria:

1. Your income and expenses currently do not allow you to maintain a basic or minimum standard of living for you and your dependents if you have to pay off student loans.

2. This financial position is likely to persist for most of the repayment period of your student loan.

3. You have made a good faith effort to try and pay off your student loans prior to filing for bankruptcy.

[READ: How to Resolve a Student Loan Dispute.]

How do I start the bankruptcy filing process and pay off my student loan?

If you have thought through your decision carefully and have done your due diligence to exhaust all other options, you may want to consider filing for bankruptcy. If so, you first need to decide which of the two common consumer bankruptcy options is best for your situation: Chapter 7 or Chapter 13. When deciding, you must weigh the pros and cons of each.

Chapter 7 is the most common type of bankruptcy filing. This requires the applicant to liquidate assets, which means that you are likely to have to sell most of your property in order to pay off some of your debts. Assets can include land, your house, your car, and even a portion of your retirement fund. This type of bankruptcy stays on your credit report for up to 10 years, making it difficult to access credit during that time.

Under Chapter 13, bankruptcy requires you to pay some of your debt in accordance with a payment plan set by the court. It stays on your credit report for up to seven years, and you may not have to sell any part of your property to pay off your debts.

You can start the process by filing for Chapter 7 or Chapter 13 bankruptcy. If you plan to seek repayment of your federal student loans, you must file a separate written complaint, which will initiate an additional litigation known as “adversarial proceedings.”

The judge will then review your situation, probably using a Brunner test. If your request is approved, your federal student loans can be repaid in whole or in part, or they can be recalculated at a lower interest rate.

It is not easy to file for bankruptcy and it has serious consequences, but paying off your student loan through bankruptcy is possible if you meet the criteria. Because of the costs and serious long-term implications, just make sure you do your research and consider all your other options before moving on.

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Student Loans and Bankruptcy: What You Need to Know originally appeared on usnews.com

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