Filing for bankruptcy can feel lonely, frightening, and overwhelming. If you are in the midst of declaring bankruptcy with unpaid student loan debt hanging over your head, you likely have many questions about how to proceed.
Millions of Americans have an outstanding balance on their student loans, with a national average of approximately $40,000 owed per borrower. As the Covid-19 pandemic rages on, bankruptcy cases are increasing and many borrowers filing for bankruptcy are wondering what will happen to their student loans during and after the proceedings.
If you are filing for bankruptcy in the wake of the pandemic, you’re not alone. Americans have experienced unprecedented unemployment, personal illnesses, and small business closures at an increasingly rapid rate. Let’s explore what happens to your student loans when you file for bankruptcy, how to petition to get them discharged, and how to manage your student loans until they can be repaid.
Are My Student Loans Discharged In Bankruptcy?
This is a valid question. Many Americans suffer from crushing student loan debt, and no matter how much you save after college it still can feel difficult to reduce your personal debt in your 20s. If you’re one of the many who are filing for bankruptcy, you may be wondering whether you qualify for a student loan discharge as well.
The simple answer is no. Your student loan debt is not forgiven, nor is it automatically discharged when filing for bankruptcy. It is challenging, though not impossible, to get your loans discharged in bankruptcy.
How Do I Discharge My Student Loans?
If you’re filing Chapter 7 bankruptcy, you’ve likely already contacted a qualified bankruptcy lawyer to help you with your case. Communicate with your lawyer that you’d like to pursue student loan discharge, as it requires them to file a separate motion. A law professional will be instrumental in helping you prove your inability to pay off your student loan debt due to “undue hardship.”
In order for your loans to discharge in bankruptcy, your lawyer must prove that repayment will cause catastrophic financial harm to you and your family. Using the standard of undue hardship, you must show that you are unable to repay the student loans while maintaining a basic standard of living, that you will remain unable to pay for the foreseeable future, and that you have at least made a good faith attempt to repay them.
The tricky thing about undue hardship is that it’s subjective; the court must decide whether or not you meet the three requirements mentioned above. However, with a good lawyer and a well-presented case, you may find success.
What If I’m Unable To Prove Undue Hardship?
If you’re unable to prove undue hardship, there are other ways to manage your student loans. Filing a Chapter 13 Bankruptcy is often called a “reorganization,” named for the court’s plan to reorganize your repayment over the course of 3-5 years. Filing under Chapter 13 may offer you consolidated student loan repayment that Chapter 7 does not; although when you come out of bankruptcy you will still be responsible for repayment.
There are additional ways to manage your student loan debt, such as looking into an Income-Driven Repayment Plan (IDR) that calculates your income and allows you to make smaller, more manageable monthly payments that suit your budget. You can also look into loan deferment for certain career paths.
While your student loan debt is not automatically forgiven in bankruptcy, you can manage your student loans by proving undue hardship or seeking other avenues such as consolidation, deferment, or income-based repayment plans.
Even if you’re unsuccessful in discharging your loans, the reduction of your other debts through filing for bankruptcy is bound to ease your student loan payments in the future.