Here is a shocking statistic: $50 billion student loans could qualify for bankruptcy.
Here’s what you need to know — and what it means for your student loans.
A new report from the Student Borrower Protection Center found that:
- It is a myth that private student loans are not dischargeable in bankruptcy;
- It is a myth that private student loans are repayable only after demonstrating financial hardship; and
- Tens of billions of dollars in student loans can be repaid 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 the event of bankruptcy: the Brunner test
Unlike mortgage or credit card debt, student loan debt is generally not dischargeable in bankruptcy. However, you can get student loan forgiveness if you can show “undue financial hardship.” (Biden canceled $15 billion in student loans). To discharge student loans through bankruptcy, an adversarial proceeding (a lawsuit in bankruptcy court) must be filed, and a debtor would claim that payment of student loan debt would create undue hardship on the debtor. the Brunner standard states:
- the student loan borrower has extenuating circumstances creating hardship;
- these circumstances are likely to continue for the duration of the student loan; and
- the borrower made a good faith attempt to repay the student loan.
(Here’s Who Won’t Get Student Loan Forgiveness).
Can private student loans be discharged in bankruptcy?
According to the Student Borrower Protection Center, most private student loans can be canceled in the event of bankruptcy. “People refer to [private education loans]…like a private student loan – but many of these loans are not actually the specific type of private student loan that faces additional hurdles to discharge in the event of bankruptcy. The reason more student borrowers have not sought to repay their private student loans in bankruptcy is not because of “undue financial hardship.” (The student loan forgiveness could be the reason the Democrats lose the midterm elections). The report says student loan servicers tricked student borrowers into choosing other student loan repayment options when bankruptcy might have been the best choice. For example, according to the report, these loans are dischargeable in the event of bankruptcy: bar student loans; career loans from unaccredited schools; and direct consumer loans. (Where Biden stands on student loan cancellation).
What this means for your student loans
First of all, it is possible to discharge student loans in the event of bankruptcy, but this is a significant challenge. In most cases, a student borrower must prove undue hardship. Second, the report shows that lawmakers should regulate student loan servicers who misrepresent a student borrower’s ability to service their student loans in the event of bankruptcy. Third, if you’re having trouble repaying your student loan, you need to determine if bankruptcy is a viable option for you. Fourth, you should explore other options such as income-tested repayment plans, which base your monthly payment on your discretionary income and family size. Fifth, you should not expect large-scale cancellation of short-term student loans. In addition, temporary student loan forbearance is expected to end soon. So, make sure you understand all of your student loan repayment options.
Here is a good starting point: