It is a common misconception that there is no way to discharge student loan debt. In fact, it is possible to have your federal student loan discharged when filing for Chapter 7 or Chapter 13 bankruptcy. However, this is not an easy process, and it is not guaranteed. Before filing for bankruptcy, you should always speak with an attorney experienced in handling bankruptcy cases to discuss your options and ensure that bankruptcy is appropriate for your situation.
Proving Undue Hardship During Adversary Proceedings
When seeking a student loan debt discharge through a bankruptcy filing, the individual filing must also file a separate action called an "adversary proceeding." During this proceeding, the person seeking the debt's discharge must prove that repaying the loan will impose "undue hardship" on themselves and any dependents they have. There is no set formula for determining what constitutes undue hardship.
When deciding, bankruptcy courts may consider several factors, including:
- Whether you made a good faith effort to repay the debt before filing for bankruptcy
- Whether repayment will inhibit your ability to maintain a minimal living standard
- Whether it appears that the hardship caused by repayment would continue for a significant portion of your repayment period
You should also be aware that the associated creditors can be present at your adversary proceeding and challenge the request.
If Successful, Will My Entire Loan Be Discharged?
Even if you are successful in proving that loan repayment would cause you undue hardship, this does not mean that your entire student loan debt will be discharged. A common misconception about bankruptcy filings is that they automatically wipe out all a person's debt, leaving them with a clean slate. This is not always the case.
While your entire loan can be discharged, it is equally likely that your loan will only be partially removed. It is also not uncommon for the individual filling to still be required to repay all of their loans, but with a reduced interest rate or other changes to the loan terms.
An Alternative to Filing for Bankruptcy: Change Your Repayment Plan
Before filing for bankruptcy, you should explore all your options. There are several different repayment plans for federal student loans, and you may find that by changing your repayment plan, you are better able to manage your debt.
Student loan repayment plans include:
- Standard repayment: fixed payments, structured for repayment within ten years
- Graduated repayment: payments gradually increase over time, also structured for repayment within ten years
- Extended repayment: fixed or graduated payments, structured for repayment within 25 years
- Revised Pay As You Earn (REPAYE) repayment: payments set at 10% of discretionary income, recalculated each year, with a possibility of forgiveness if loans are not fully paid after 20 years (undergraduate study loans) or 25 years (graduate or professional study loans)
- Pay As You Earn (PAYE) repayment: similar to REPAYE, but only eligible to new borrowers on or after Oct 1, 2007, who have received a Direct Loan disbursement on or after Oct 1, 2011.
- Income-Based (IBR) repayment: payments set to 10-15% of discretionary income, and recalculated each year, with outstanding balance forgiven after 20 or 25 years depending on when you received your loans
- Income-Contingent (ICR) repayment: payments are recalculated each year and set at 20% of discretionary income or for the amount you would pay with a fixed payment over 12 years
- Income-Sensitive repayment: only available to FFEL Program loans that are not eligible for PSLF, with a monthly payment based on income and structured for full loan repayment in 15 years
This may also be an option for you if you've filed for bankruptcy but were not successful in having your student loan debt discharged. To learn more about the available repayment plans and whether you are eligible, review the Federal Student Aid website.