Student loans cannot be discharged in bankruptcy unless the debtor can prove that repaying the loans would create a substantial hardship. The substantial hardship standard applies no matter how old your student loans are, and it applies to privately funded loans as well as loans funded and guaranteed by the federal government or nonprofit institutions.
The bankruptcy courts apply various tests to determine the existence of substantial hardship. Many courts apply a very strict test requiring that the debtor prove an inability to maintain a minimal standard of living if forced to repay student loans, no likelihood that this state of affairs will change, and a good faith effort to pay the loans before filing bankruptcy. Some courts apply more flexible tests, but in any event, proof of substantial hardship is an insurmountable hurdle for most debtors. Some courts, however, have found that a debtor can pay some portion of a student loan without substantial hardship, but have discharged the balance of the loan based on hardship.
Absent a showing of substantial hardship, the best that bankruptcy can do with respect to student loans is free up income with which to pay them by eliminating other debts. Other considerations aside, however, if you have a stable income, filing under Chapter 13 may offer some additional advantages where student loans are concerned.
In a Chapter 13 bankruptcy, you are allowed to pay all or a portion of your debts over three to five years. Including your student loans in a Chapter 13 plan can allow you to cure defaults and pay the loans down over that period of time. Some courts allow student loans to be classified as priority debts under a Chapter 13 plan, which means that proportionally more of the funds you pay into your plan will be applied to your student loans than to other unsecured debts. This is advantageous because, unlike most other unsecured debts, balances remaining on student loans after the completion of your Chapter 13 plan are not discharged. While you are making payments under your Chapter 13 plan, the automatic stay will give you some breathing room by stopping collection actions and harassment from creditors, including student loan lenders. But it bears repeating that upon the completion of your Chapter 13 plan, you will still owe any balances remaining on your student loan debts.
Student loans are regularly sold and transferred by lenders, and can be rife with accounting problems. In addition to allowing you to cure defaults and begin paying down your student loans in an orderly manner, a Chapter 13 bankruptcy may allow you to obtain a binding judicial determination of what is rightfully owed on the accounts. Another benefit of a Chapter 13 bankruptcy is that, in exceptional circumstances, you may be able to challenge the enforceability of a student loan. Like any other loan, a student loan is a contract and may be voidable or unenforceable if it was improperly induced, such as by misrepresentation or mistake
Discharging student loans in bankruptcy is neither easy nor likely. If student loans are your main debt problem, you might be better served by one of many student loan alternative payment programs. Depending on how far behind you are in your payments, you may be able to stretch payments out over a longer period with graduated payments that increase as your income increases; defer payments of principal for a period of time; or obtain a forbearance which can provide a reduction of payments, an extension of time, or the temporary cessation of payments until your career and financial circumstances have improved. If you have several student loans, you may be able to consolidate them into one loan and spread the payments over a longer period of time with a lower interest rate. In some circumstances, you may even be entitled to forgiveness of a portion of your student loans. Contact your lender for information about these options.
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