STUDENT LOAN BANKRUPTCY
HOW TO PROVE UNDUE HARDSHIP
Have you heard your student loans will follow you to the grave and you can't even discharge them in bankruptcy?
Well, today we're gonna show you how to prove undue hardship and get your student loans forgiven in bankruptcy.
Proving undue hardship can be tricky, but we've done the research so you don't have to.
So what happens to student loans during bankruptcy?
It's general advice that the loans are not forgiven unless you show undue hardship through an adversary proceedings. Most courts use the Brunner test to determine hardship, so let’s see exactly how to prove undue hardship.
3 Requirements to Prove Undue Hardship
- You wouldn't be able to maintain a minimal standard of living if you have to pay back your federal student loans. You must have a bare-bones budget and have done everything in your power to increase your income with no success.
- Must be able to prove that the circumstances are going to be there for the majority of your repayment period. For instance, if you have a serious mental or physical disability, if you receive poor quality education, or if you’ve already maximized the income potential in your current field.
- You've made a good-faith attempt to repay your federal student loan before this point. This means that you've tried to make payments, you've negotiated with the lender and you've worked at slashing your expenses and increasing your income.
Let's say you go to bankruptcy court and you go through the adversary proceeding. If it’s successful your loans will either be partially discharged, fully discharged or they could also be restructured. When loans are restructured you'll receive new repayment terms, likely lower interest rate, a longer time-frame to pay them back which will result in lower payment.
If you went to a for-profit school
There is one caveat here to consider if you went to a for-profit school, make sure to raise a defense related to the school’s practices. If you can prove there was a breach of contract or deceptive practices, you can have a chance at convincing the judge to just charge your student loans.
We've read about some of these things happening with schools who promised certain career opportunities or certain wages after graduation as part of luring students into these for-profit schools. A lot of judges are ruling in favor of the students that they were duped or deceived into going to the school in the first place and acquiring all of that debt.
Negatives to Filing Bankruptcy
Obviously, there are some negatives to consider before going into bankruptcy.
- It definitely hurts your credit score. You won't be able to buy a house for 7 years.
- The legal fees cost money. If you can't find an attorney that will take you on pro bono, you would be out of pocket for those expenses.
- It's really exhausting and an extensive process that could take 6 months to a year to complete.
As we've talked about above, if you've done everything you can and you still can't pay back your loans, it might be the only option for you.
If that's the case, here are some things to consider before going into bankruptcy court.
Things to Consider Before Filing Bankruptcy
- Make sure you've exhausted all of your other options. We touched on that above, but it's gonna be really important to the court that you've done your best. Not only that, but also to confirm there is no way you can avoid going into bankruptcy. Some of these things could be looking at income driven repayment plan, pursuing forbearance or deferment, or if you're eligible definitely look into public service loan forgiveness.
- With private loans, make sure that you've already talked to your lender and you've tried to restructure or get reduced payment plan, reduce interest rate, or reduce payments. Definitely call your lender before pursuing bankruptcy.
After you've exhausted all those options, the next step would be to find a lawyer that has successfully discharged student loans. The lawyer would need to file an adversary proceeding, which we will talk about it in a bit, to get the student loans successfully discharged.
While an attorney isn't absolutely necessary, you'll want one to improve your odds of having the loans discharged as it is quite difficult to get them discharged.
You'll likely also need to find a pro-bono attorney who would take your case on free of charge. If you are in this situation where you can't pay your student loans, you'll likely be unable to afford the attorney fees otherwise.
Then, once you’ve found a lawyer who will take you on pro-bono, just do what the lawyer says. You may be able to file chapter 7 or you may be able to file chapter 13 depending on your personal situation.
With chapter 7 your loans could be discharged, but with chapter 13 your loans would be restructured and not discharged. So, with chapter 13 you will have to continue to pay those student loans, although they will be on more manageable terms.
Then, the lawyer will file the adversary proceedings, which is a lawsuit related to the bankruptcy and then the judge will determine whether not you will receive a full discharge, a partial discharge, no discharge or a restructure.
As always, talk to a legal professional before making any big decisions like this. You can find a list of reputable lawyers by searching the American Bar Association. Many of them will offer a free consultation to review your case and to access your personal situation.