The cost of higher education has been rapidly outpacing earning potential for at least 30 years. Since the 1991-92 school year, tuition at a four-year public college has ballooned from an average of $4,160 per year to $10,740—a price point that is out of reach for the average student and their family.
This rapid acceleration in college tuition has led to a growing financial crisis. Parents are increasingly taking on this debt for their children, too, with the average parent student loan balance averaging $35,000 in the 2018-19 school year. Altogether, approximately 44 million people in America are carrying a combined $1.7 trillion in student loan debt.
Due to the COVID-19 pandemic, payments for federal student loans have been suspended since Mar. 12, 2020, and interest on current balances remains at 0%. The legality of this emergency relief has been called into question, though, and payments are set to resume on Aug. 29, 2023, if the matter is not resolved.
With the possibility of student loan payments resuming later this year, student loan borrowers who are currently struggling with their finances may be worried about what will happen in the future. In this blog, we’ll answer the question that we know so many of you are wondering: Can you file bankruptcy on student loans?
Discharging Student Loans in Bankruptcy Is Complicated
It is technically possible to discharge student loans through bankruptcy, but past legislation has made the process exceptionally difficult. In 1976, an amendment to the Higher Education Act of 1965 severely limited the ability of student loan borrowers to seek financial relief through bankruptcy. The 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) further diminished the ability to discharge both private and federal student loans in bankruptcy.
The FRESH START Act of 2021 was introduced on Aug. 4, 2021, and has since been referred to the Committee on the Judiciary for further consideration. The goal of this bill is to “restore the ability for struggling borrowers to seek a bankruptcy discharge for federal student loans after a waiting period of ten years.”
If passed, federal student loans would be eligible for discharge in bankruptcy ten years from the date of the first payment. The existing ability to prove undue hardship and have loans discharged prior to ten years after the first payment would remain.
How To File Bankruptcy on Student Loans
Discharging student loans in either Chapter 7 or Chapter 13 bankruptcy requires adherence to a specific set of procedures. Some of these steps are outlined below, but if you have any questions about your case or have further inquiries regarding the process of filing for bankruptcy, please contact Belsky & Horowitz, LLC for a free consultation.
Prove Undue Hardship
The first step is to compile evidence of undue hardship. Discharging student loan debt often comes down to whether they create an undue hardship on the borrower. Most states (including Maryland) use the Brunner test to determine undue hardship for these types of bankruptcy cases.
The typical Brunner test involves three different areas of evaluation:
- If forced to pay off student loans, you would be unable to maintain a minimal standard of living for you and your dependents based on your current income and expenses.
- It is likely that your circumstances will persist for the entirety or majority of the repayment period.
- There is evidence that you have made efforts to repay the loan in good faith.
To pass the Brunner test, you must satisfy each of the above criteria.
Attend an Adversary Proceeding
In bankruptcy cases involving student loans, debtors are required to attend an adversary proceeding. An adversary proceeding is a hearing at bankruptcy court that determines your eligibility to discharge your student loan debt. During this meeting, you can provide your evidence of undue hardship.
Decide Which Type of Bankruptcy To File
Chapter 7 and Chapter 13 are the two most popular forms of bankruptcy for consumers. Chapter 7 bankruptcy is considered a liquidation bankruptcy, as nonexempt property is sold to satisfy creditors prior to the discharge of any remaining debt. Chapter 13 bankruptcy is known as a wage earners’ bankruptcy and involves creating a three to five-year repayment plan prior to the discharge of any remaining debt.
Depending on what type of bankruptcy you qualify for, if eligible, your student loans will be partially discharged, discharged, or restructured as part of a larger repayment plan.
Alternatives to Bankruptcy for Student Loans
If you’ve been told that your student loans are ineligible for bankruptcy, you may still have viable options for limiting their financial impact on your life. Alternatives to bankruptcy for student loans include:
- Income-driven repayment plans
- Extended repayment plans
- Teacher loan forgiveness
- Public service loan forgiveness
The current COVID-19 loan payment pause includes temporary interest rates of 0%. If you have the ability to pay even a small amount toward your student loans, this presents a unique opportunity to pay down the principal amount of your loan without accumulating an additional balance from interest.
Do You Need a Lawyer To Discharge Student Loans?
Filing for bankruptcy can be a complicated process, even in the absence of student loans. While you are not required to obtain the services of a lawyer prior to filing for bankruptcy, doing so can greatly improve your chances of successfully discharging your private or federally-held student loans.
A bankruptcy lawyer will be knowledgeable in all deadlines, procedures, meetings, and requirements associated with filing for bankruptcy. If you have student loans, the guidance of an experienced attorney can be an invaluable asset to your case, as you will be up against a system designed to make discharging your student debt as difficult as possible.
Preserving Your Financial Stability With Belsky & Horowitz, LLC
The cost of pursuing higher education is a barrier that most people are unable to navigate without the aid of student loans. However, as many students in Maryland are now realizing, the promise of securing high-paying jobs after college was less than truthful. Even with a degree, borrowers often struggle to find jobs that allow them to pay off their student loans without difficulty.
If your current student loan debt has created an undue hardship in your life, please contact the legal office of Belsky & Horowitz, LLC as soon as possible. We’ll help you evaluate your current financial situation, your options for Chapter 7 or Chapter 13, and whether your student loans may qualify for discharge or restructuring in bankruptcy.
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