You took out student loans to go to college and improve your life. Now, your income is not what you expected after college due to not being able to find a job in your field or losing a job you may have held. While you can consolidate, re-finance, defer, or file for loan forgiveness, these programs will still leave you stuck with having to repay most, if not all, of what you borrowed unless you die or experience a disability. You may have considered filing for bankruptcy to erase your personal debt completely, but then realized that after filing for either chapter 7 or chapter 13 bankruptcy, you will still be stuck with your student loans. However, you can have your student loans discharged along with the rest of your debt when filing for chapter 7 bankruptcy or even when filing for chapter 13 bankruptcy, and here's how to do it.
1. Process for Having College Loans Discharged when Filing for Chapter 7 Bankruptcy
Filing for bankruptcy can erase your student loan debt if you also file for the undue hardship extension. While not everyone qualifies for student loan dismissal, many people do, so it is worth filing this form to then allow the judge to consider your circumstances. If you attended a for-profit trade school, you are more likely to be eligible to have your loans dismissed when filing for this extension.
The form you need to file along with other traditional bankruptcy forms is called the a Complaint to Determine Dischargeability or Adversary Complaint. This will then make it known to the court that you plan to have your student loan debt discharged along with any other debts you have. Experts recommended that you file this form with your initial bankruptcy forms when declaring chapter 7 bankruptcy, since the process for filing chapter 7 bankruptcy is so short and simple, typically lasting under three months.
Courts then use one of two tests to determine if you are eligible to have your student debt discharged, which is either the Brunner test or the Totality of the Circumstances test. While the specific tests are a bit different, they have many similarities.
The Brunner test instructs the judge to consider if you meet the following criteria:
- Did you at least attempt to repay the loans in good faith in the past? The answer should be yes.
- Can you maintain a minimum standard of living and repay the loans? The answer should be no, although there is no specific standard of living that meets the test criteria. Most judges would consider not being able to live independently on your own with your dependents, feed your family, and other basic vital parts of life to be below a minimal standard of living.
- Are there additional circumstances that will keep you from being able to make your loan payments for a substantial period of time? There is no right answer to this, but additional hardships can help you in court. Hardships can vary widely. For example, did you recently begin caring for a mentally ill family member? Did you have health problems that keep you from working, or does a child have health issues that keep you home caring for them? There are never-ending reasons people endure financial hardship, and this question takes those extra circumstances into account.
The Totality of Circumstances Test instructs the judge to consider:
- Your current and potential future resources and whether you are expected to suffer undue hardship if your loans are not discharged.
- Whether you will still have money to cover your and your dependents necessary living expenses while making the loan payments.
- Any additional circumstances that prevent you from being able to pay off your loans without suffering undue hardship, similar to the hardships the Brunner test considers.
When preparing to argue your case in court, keep these criteria in mind and make sure to explain to the court how whether and how you meet them. They will then use this information to consider whether you should be awarded dismissal of your loans.
2. Differences when Filing Chapter 13 Bankruptcy
There is really only one difference between adding college loan dismissal to your chapter 13 bankruptcy case compared to adding it to a chapter 7 case. Experts recommend waiting until your discharge date (typically 3 to five years after filing) is nearing to file your adversary complaint. This is believed to improve your chances of having the school loans discharged for several reasons.
First, due to the fact that chapter 13 bankruptcy has you repay many of your other other debts by making monthly installments, you will then have shown the court that you have made an honest effort to pay off your debts, but are now facing even more debt that you simply cannot pay without enduring extreme hardship for many more years. Also, once you repay those debts, your financial stance may have declined rapidly.
Once you file this form during the end of your chapter 13 case, the process will continue in the same way it does when filing with a chapter 7 case.
If taking out student loans did not help you achieve the later financial success in life that you had hoped for, then realize that you can have these loans discharged and out of your life completely if you ask your bankruptcy lawyer to file the right forms at the right time during your case. While the final judgement is in the hands of the court, if you are suffering true financial hardship, don't give up on finally achieving the true loan forgiveness you need.