What happens to student loans in bankruptcy? Can you file bankruptcy on private student loans, not just the ones you take out from the government. Find out now.
You’ve made it through college on your own with private or government student loans. You are proud of your accomplishments but haven’t been able to make enough consistent student loan payments. And on top of that, you’re falling behind in your other credit accounts, as well.
Can you file bankruptcy on private student loans? Is that even possible?
Yes, it is possible to file bankruptcy because it is a dischargeable debt but it is difficult to do.
The information below will help guide you on criteria for filing bankruptcy on your private and federal student loans. The guide will also give you a tangible way forward so that you can escape hounding creditors while making barely enough money to live.
How Does Bankruptcy Work?
When you need to discharge your private student loans, the first thing you need to do is find a reputable bankruptcy attorney. It may not be a mandatory court order to have legal representation, but it’s your best bet at navigating the very complicated bankruptcy process.
Private student loans are not easily discharged; it’s a unique process that falls into three categories:
- Federal student loans
- Private student loans
- Federal Parent loans – These are sometimes called Plus loans.
Sometimes, it’s easier to qualify for hardship relief for federal student loans than private student loans, but there are options you can explore with your attorney.
Can You File Bankruptcy on Private Student Loans?
If you qualify under any of the below hardship options, you may have a way forward with your bankruptcy
Economic Hardship Deferment Option
The economic hardship deferment for student loans occurs when you’ve been laid off, your unemployed, you’re on maternity leave, or have a disability. The disability can be short-term or long-term. If you meet any of the above criteria you can sometimes defer your student loan payments for up to three years.
Also, your interest on the subsidized Stafford loan won’t accrue. But, your interest on the unsubsidized Stafford loan will accrue.
Economic Hardship Forbearance
This is almost identical to the hardship deferment, except your interest on all your subsidized and unsubsidized student loans continue to accrue. Also if granted forbearance, your payments are suspended for up to five years and sometimes longer. Again, forbearance can be granted if you’re on medical leave, maternity, lost your job or have a short or long-term disability.
Bankruptcy
Private student loans have a default level of 10 percent. That translates to 4.4 million student loan borrowers defaulting on over $1 trillion dollars of student loans. You can file for student loan Chapter 7 or Chapter 13 bankruptcy.
If granted Chapter 7 or Chapter 13 bankruptcies, they stay on your record, but it’s not as long as you think. Chapter 7 last 10 years. Chapter 13 bankruptcies last seven years.
Chapter 7 bankruptcy allows for all your unsecured debt to be discharged. Chapter 13 bankruptcy tries to reorganize your debt into payments you can afford. The bad news is, you can file for bankruptcy from a private or federal student loan, but less than 1 percent of people get it unless the criteria of undue hardship listed above are proven.
One of the first things you want to do after hiring your attorney is finding out how you qualify in claiming undue hardship. Claiming undue hardship for you or your dependents is one of the only ways you can file for bankruptcy with the court.
Definition of Undue Hardship
If you are unable to now or in the future, repay your student loan without it negatively impacting your ability to maintain a minimum standard of living you have met the criteria the court defines as undue hardship. Most of the time the court wants to see some medical issue or other form of disability. The definition of undue hardship is called the Brunner Test.
The Brunner test dates back to a court decision in 1987. There are some courts that use a different standard and definition of undue hardship, but only your attorney will be able to navigate those discrepancies. Ultimately, the court gives weight to whether or not you’re seeking a discharge of your private or federal student debt loan in good faith.
The court will look at your attempts to repay the loan and when you failed to meet your loan obligation. They will try to determine if you’re unable to pay back your student loan due to poor financial decisions rather than a true hardship.
File a Complaint To Begin the Adversary Proceeding
Now that you’ve filed for your bankruptcy, erasing your student loans takes yet another step. It takes filing an additional lawsuit known as the adversary proceeding. You may understand now why it is so essential to have an attorney working with you on this complicated legal process.
To file for an adversary proceeding, you must file a written complaint which outlines your case. Then your case is litigated in front of the judge who renders a final ruling for full discharge, partial discharge, or no discharge.
What’s the Next Step?
You now know the answer to can you file bankruptcy on private student loans. You’ve learned that filing Chapter 7 or Chapter 13 bankruptcy requires a lot of work before you ever go to court. Filing for an Adversary Proceeding requires even more attention.
The legal writings are researched, written, and supported before going in front of the judge. But even if your bankruptcy proceedings don’t discharge your student debt, it can still be your best course of action. Getting out from underneath all your additional outstanding debts frees up enough money sometimes to work out a way to consolidate your student loans.
Husker Bankruptcy can help you get the best legal results for discharging your private or federal student loans because after all, the laws are in place to give people a second chance. Reach out to us to learn about your options for discharging your student loans.
When you need that second chance, call Husker Bankruptcy at (111) 111-1111. We will be there to help you start over.