If you’re considering bankruptcy, you may be wondering how it will affect your student loans. The simple answer is that student loans are generally not dischargeable in bankruptcy. However, there are exceptions, and it’s important to understand what this means for your financial situation.
Student loans and bankruptcy basics
In most cases, filing for bankruptcy won’t erase your student loan debt. Federal law prevents discharging student loans in bankruptcy, unless you can prove “undue hardship.” This means you must show that paying your student loans would prevent you from maintaining a minimal standard of living and that your financial situation is unlikely to improve. Courts rarely grant this exception, but it’s possible under certain circumstances.
What is undue hardship?
To prove undue hardship, you must file a separate action called an “adversary proceeding” within the bankruptcy process. Courts use a test called the “Brunner Test,” which evaluates whether you can meet basic living expenses, whether your financial situation will improve, and if you’ve made a good-faith effort to repay the loans. If you can prove all these factors, there’s a chance your student loans may be discharged.
What happens if your loans aren’t discharged?
Even if your student loans aren’t discharged, filing for bankruptcy can still provide relief. For example, Chapter 13 bankruptcy might allow you to reorganize your debts and create a manageable repayment plan. This could help you get your finances back on track and improve your ability to make your student loan payments over time.
How can you manage student loan debt after bankruptcy?
If bankruptcy doesn’t discharge your student loans, consider other ways to manage the debt. You can explore income-driven repayment plans or look into refinancing options. Although bankruptcy won’t remove student loan debt, it can give you the breathing room you need to address your financial challenges and work toward a solution.
While student loans can be difficult to handle in bankruptcy, there are still options for managing the debt and rebuilding your financial health.