Can Bankruptcy Erase Student Loans?

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Written by Jonathan Petts, Esq.  
Updated June 4, 2019

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There are more than 44 million Americans estimated to collectively owe 1.5 trillion dollars in student loan debt. According to recent reporting, approximately 42% of people who have gone to college have taken on student loan debt and the average new grad owes $28,400 in student loan debt. It is no wonder why so many people are looking for a way to erase their student loan debt.

If you are struggling with student loan debt and are looking for a way to erase it you are not alone. That same reporting found that, of those people with student loan debt, 20% are behind on their payments.

In this article:

  • How does bankruptcy work with student loan debt?

  • Does it matter if your student loans come from private or public sources?

  • Are there ways to deal with student loan debt?

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Bankruptcy and student loan debt

Traditionally, bankruptcy cannot be used to erase student loan debt like it can be used to deal with other forms of debt such as credit card and mortgage debt. For the most part, it can be difficult to use bankruptcy as a way to erase student loan debt.

This means that if you file for bankruptcy you will likely still have to repay your student loans.

The kind of student loan debt you have does not matter when it comes to bankruptcy. Whether you have student loans taken from the government or private loans taken from banks they are governed by the same rules. That means you generally can not use bankruptcy to erase student loan debt no matter who you borrowed from.

Lawmakers were generally worried that people would take on student loan debts and then declare bankruptcy after graduation as a loophole around paying their loans. That led lawmakers to create a student loan exemption from most bankruptcy laws. Unfortunately, the current state of student loan debt in the United States makes this provision a real problem for many Americans struggling with student loan debt.

This has not always been the case. Up until the 1970s student loan debt was treated like any other kind of debt. That meant you could erase student loan debt with bankruptcy in the same way you could deal with credit card debt. However, this all changed in 1978 when Congress gave student loan debt a special status preventing them from being dealt with in bankruptcy.

The law may be changing to allow you to use bankruptcy to erase student loan debt. Many influential government officials and lawmakers have come out and said that the current student loan debt policy is problematic. Various changes have been proposed that may allow people to use bankruptcy to erase student loan debt.

That may mean the law could change to make it easier use bankruptcy to erase student loan debt. In the meantime, dealing with student loan debt via bankruptcy can be challenging.

However, there are certain exceptions, if you qualify for, allow you to use bankruptcy to deal with your student loan debt. In order to qualify you will likely need to go to court and argue that you qualify for an exception to the standard rule preventing people from using bankruptcy from erasing their student loan debt. If you think this option is right for you, you might want to get an attorney to help guide you through the process.

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The financial hardship test

Most courts have adopted an exception that allows people to erase student loan debt with bankruptcy if they can show that their student loan debt is causing them undue hardship. This exception is called the “Brunner test” which looks at your circumstances to evaluate whether you can use bankruptcy to deal with student loan debt. If you qualify, then you can use bankruptcy as a way to deal with your student loan debt.

The court will look at three things to determine if you can use bankruptcy to deal with your student loan debt.

First, the court will see if you have any extenuating circumstances creating a hardship.

Second, the court will see if you those circumstances will continue for the time you have your student loan.

Third, the court will see if you have made good faith efforts to repay your loan. You are not disqualified if you have been unable to make any payments on your student loan debt, but you need to have taken steps to pay off your student loans. That could be something like trying to set up a payment plan with your creditor.

Most courts are reluctant to use this exception. Unless you are over 50 with substantial student loan debt it is generally difficult to qualify for this exception.

If you qualify for this exception the court has three options for how to deal with your student loan debt.

First, the court could erase all of your student loan debt. You would not have to repay any portion of your loan and all collection activity would stop.

Second, the court could erase a portion of your student loan debt. You would still have to repay the portion of your loan that the court did not erase.

Third, the court could require you to repay your loan, but with different terms. This could mean you would have to repay your student loan, but with a lower interest rate or over a longer time period.

It is important to note that while most courts use this rule not all of them do. You should make sure to check to see if the same rule applies where you live to see if you can use this test to deal with your student loan debt.

If you live in one of the few places where this test cannot be used there is still hope. Other jurisdictions have similar exceptions that allow people in certain circumstances to discharge their student loan debt.

Other ways to deal with student loan debt

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Income Driven Repayment

If your student loan debt comes from federal student loans you may be eligible to qualify for income driven student loan repayment programs. These programs like IBR, PAYE, or REPAYE make your student loan payments depend on your income, family size, and other factors. Generally, this means you will have a lower payment on your student loan debt.

Even better, after a certain amount of time your remaining federal student loan debt will be erased. The amount of time depends on which program you are enrolled in, but some programs will erase your entire debt after 20 or 25 years.

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Student loan debt resources

There are many free resources to help you deal with your student loan debt. These include calculators to help you figure out how much you should make in payments to best deal with your debt. You can use these tools as a way to figure out the best way to payoff your student loans if you are able.

There are also free guides available to help you figure out the consequences of taking out new student loans. If you are thinking about taking out student loans to finance your education you should use these resources to plan ahead.

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Erase your other debts

If you have other debts besides student loan debt, dealing with them first may free you up to better deal with your student loan debt. There are many options for dealing with debt from bankruptcy to negotiating repayment plans.

If you can erase any other debts you have you will have an easier time dealing with your student loan debt.

Bankruptcy may be an appealing option to erase your other debts. Even if you can not use bankruptcy to erase your student loan debt, you may be able to use it to erase your credit card debt, mortgage debt and more. Once you have dealt with other debts you have you will have less to worry about when dealing with student loan debt.

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If you are dealing with student loan debt you are not alone. Not only are many other Americans dealing with the same problem, but there are solutions available for you to use.

If you think bankruptcy might be the right option for you, it is important to understand how it can benefit and impact your particular situation and whether or not the timing is right for you to file.

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