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Managing Student Loan Debt: Bankruptcy and Alternatives

Struggling with student loan debt can be overwhelming, but there are ways to manage it effectively. Whether you’re considering bankruptcy or exploring other options, it’s important to understand your choices and take action early. At O1ne Mortgage, we are here to help you navigate your financial challenges. Call us at 213-732-3074 for expert mortgage services and personalized advice.

Can You File Bankruptcy for Student Loans?

It’s possible to get student loans discharged in bankruptcy, but it can be challenging. By law, bankruptcy trustees prioritize certain types of debts, such as child support, alimony, unpaid taxes, and criminal fines, over unsecured debts like student loans. While priority debts generally cannot be discharged, you may be able to be released from non-priority debts, including student loans, if you can prove undue hardship.

Fortunately, recent guidelines from the U.S. Department of Justice and the U.S. Department of Education aim to make the process fairer and more transparent, giving borrowers a better idea of whether they meet the criteria for discharge.

How to Get Student Loans Discharged in Bankruptcy

Bankruptcy can be a difficult process with serious, long-term consequences. However, if you’ve exhausted all other relief options, it may be the only remaining choice. Here are some steps to get started:

1. Work With a Lawyer

While you can technically file for bankruptcy on your own, it’s advisable to enlist the help of an attorney. They can guide you through the process, help you maximize the effectiveness of the proceeding, and protect your consumer rights. Discuss your student loan debt with your attorney to gauge the possibility of getting it discharged.

2. Decide if You Will File Chapter 7 or Chapter 13 Bankruptcy

Both Chapter 7 and Chapter 13 bankruptcy can provide relief, but they differ in their approaches:

• Chapter 7: Also known as liquidation bankruptcy, Chapter 7 involves selling some of your assets to pay off as much eligible debt as possible, with the remaining debt being discharged. You’ll need to pass a means test to qualify, and the bankruptcy record will remain on your credit reports for 10 years.
• Chapter 13: Known as personal reorganization bankruptcy, Chapter 13 allows you to reorganize your debts and make affordable monthly payments over three to five years. Any eligible debt not paid off will be discharged, and the bankruptcy record will remain on your credit reports for seven years.

Consider your situation and options carefully, and seek advice from your attorney on which path to take.

3. File an Adversary Proceeding

An adversary proceeding is a separate lawsuit within a bankruptcy case, specifically for your student loan debt. In it, you’ll request that the court find that keeping the debt would cause undue hardship for you and your dependents.

How to Prove Undue Hardship for Student Loans

As part of your adversary proceeding, you’ll need to explain how your student loans are causing undue hardship. The criteria for demonstrating undue hardship can vary from court to court, but there are two common tests:

Brunner Test

With the Brunner Test, you can discharge your student loans in bankruptcy if all three of these factors are present:

• Poverty: If you’re required to continue making your loan payments, you’ll be unable to maintain a minimal standard of living for yourself and your dependents based on your income and expenses.
• Persistence: Your current financial situation likely won’t change for a significant portion of your student loan repayment period.
• Good faith: You’ve made a good faith effort to repay your student debt.

Totality of the Circumstances Test

With this test, the court will review all relevant factors of your situation to determine whether an undue hardship exists. It’s up to the court to decide based on the information you provide.

Alternatives to Bankruptcy for Student Loans

If you find that your situation doesn’t qualify you for student loan discharge, consider other ways to get relief or pay off your debt with more affordable terms:

Income-Driven Repayment Plans

If you have federal loans, you may qualify for up to four different income-driven repayment plans. These plans reduce your monthly payment to a percentage of your discretionary income and extend your repayment term to up to 25 years. If you still have a balance when the repayment term ends, the remainder will be forgiven.

Deferment or Forbearance

If you’re experiencing temporary financial difficulties, you may qualify for deferment or forbearance of your student loan payments. These options allow you to pause your monthly payments for a certain period, though interest typically still accrues. This can provide temporary relief, but you’ll need to make up those payments later.

Student Loan Forgiveness or Repayment Assistance

Depending on your career path, you may qualify for student loan repayment assistance or forgiveness. Look into programs like Public Service Loan Forgiveness (PSLF) and Teacher Loan Forgiveness, as well as employer-based repayment assistance programs.

Take Steps Early to Avoid Credit Damage

If you’re unsure about making your student loan payments, take steps early to avoid missing payments and defaulting on your debt. Both scenarios can damage your credit score, making it difficult to get approved for favorable credit terms in the future. Monitor your credit regularly to understand how your actions impact your credit score and to spot potential issues before they cause significant damage.

At O1ne Mortgage, we understand the challenges of managing student loan debt and are here to help you navigate your financial journey. Contact us at 213-732-3074 for expert mortgage services and personalized advice. Let us help you achieve financial stability and peace of mind.

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