Here’s a shocking statistic: $50 billion of student loans could be eligible for bankruptcy.
Here’s what you need to know — and what it means for your student loans.
A new report from Student Borrower Protection Center found that:
- It’s a myth that private student loans aren’t dischargeable in bankruptcy;
- It’s a myth that private student loans are dischargeable only after showing financial hardship; and
- There are tens of billions of dollars of student loans that can be discharged through the personal bankruptcy process.
Are you ready to file for bankruptcy to get your student loans discharged? (How federal student loans will change this year).
Student loans in bankruptcy: The Brunner Test
Unlike a mortgage or credit card debt, student loan debt is not typically dischargeable in bankruptcy. However, you can get student loan forgiveness if you can prove an “undue financial hardship.” (Biden has cancelled $15 billion of student loans). To discharge student loans through bankruptcy, an Adversary Proceeding (a lawsuit within bankruptcy court) must be filed, and a debtor would argue that paying student loan debt would create an undue hardship for the debtor. The Brunner standard states:
- the student loan borrower has extenuating circumstances creating a hardship;
- those circumstances are likely to continue for a term of the student loan; and
- the borrower has made good faith attempts to repay the student loan.
(Here’s who won’t get student loan forgiveness).
Can private student loans be discharged in bankruptcy?
According to Student Borrower Protection Center, most private student loans can be discharged in bankruptcy. “People refer to [private education loans]…as a private student loan — but many of these loans are not actually the specific type of private student loan that faces extra barriers to discharge in bankruptcy.” The reason that more student loan borrowers haven’t pursued discharging private student loans in bankruptcy is not because of “undue financial hardship.” (Student loan forgiveness could be the reason that Democrats lose the midterm elections). The report states that student loan servicers have misled student loan borrowers in choosing alternative student loan repayment options when bankruptcy may have been the best choice. For example, according to the report, these loans are dischargeable in bankruptcy: bar study loans; career loans at nonaccredited schools; and direct-to-consumer loans. (Where Biden stands on student loan cancellation).
What this means for your student loans
First, discharging student loans in bankruptcy is possible, but it’s a tall order. In most cases, a student loan borrower has to prove undue hardship. Second, the report shows that lawmakers should regulate student loan servicers who misrepresent a student loan borrower’s ability to discharge student loans in bankruptcy. Third, if you’re struggling to make student loan payments, you should determine if bankruptcy is a viable option for you. Fourth, you should explore alternative options such as income-driven repayment plans, which base your monthly payment on your discretionary income and family size. Fifth, you shouldn’t expect wide-scale student loan cancellation in the near-term. Plus, temporary student loan forbearance is scheduled to end soon. So, make sure you understand all your options for student loan repayment.
Here’s a good place to start:
Student Loans: Related Reading
Here’s who won’t get student loan forgiveness
Do you qualify for $5 billion of student loan forgiveness?
How to get $1.7 billion of student loan forgiveness
7 ways to get a lower student loan payment