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    Can You File for Bankruptcy On Student Loans?

    It is difficult, not impossible to get your student loans discharged by filing for bankruptcy. You’ll need to prove any undue hardship. Given the US Bankruptcy Code doesn’t clearly define an undue hardship, the lenders and courts interpret it differently.

    If you want to file for a bankruptcy, here are some things that you should immediately start working on.

    How To File for Student Loan Bankruptcy

    Filing a student loan bankruptcy is easy but proving the valid reason for it is where the process gets more difficult. It is a lengthy process and incurs additional expenses like attorney fees, documentation charges, and more.  Before we explain how to file bankruptcy, let’s clarify the most-common doubt 

    Does bankruptcy clear student loans?

    As per the US Bankruptcy Law, student loans are more difficult to discharge than other unsecured debts. You need to file an adversary proceeding post-approval to get your debts written off. There are different ways to test the hardship stated, and it depends on the court to choose one or more methods.

    Here’s the ideal way of filing bankruptcy on student loans:

    - Hire A Bankruptcy Attorney – This isn’t an absolute requirement but hiring a professional can help you handle the legal requirements better. Keep in mind that hiring an attorney may cost hundreds to thousands of dollars depending on your location and the complexity of your bankruptcy application.

    - File Chapter 7 Or Chapter 13 – Your attorney can help you decide which best suits you – Chapter 7 or 13 bankruptcy. You’ll need to file for bankruptcy under either of these options before requesting a student loan discharge.

    - File An Adversary proceeding – This is an extra step that you’ll need to perform if you want to discharge an existing student loan. Your attorney will file a written complaint describing your case. Based on this complaint, the case will be litigated further until a judge delivers a verdict.

    Undue Hardship Conditions

    Can student loans be included in bankruptcy?

    Yes, to discharge your student loan via bankruptcy you’ll need to prove that repaying the debt will force you (and dependents) into undue hardship.

    The standards to assess undue hardship varies from trial to trial. In order to assess undue hardships, bankruptcy courts do not use a single criterion, but can analyze one or more aspects. Many student borrowers feel that their loans are undue hardships.

    However, in order for the bankruptcy court to take your side, you're going to have to meet specific conditions.

    1. You won’t be able to maintain the minimal standard of living if you’re forced to repay – More simply, this means you have limited income, high expenses, and your debt-to-income ratio is higher than the set median. Besides these circumstances, you must have tried different ways to raise your income.
    2. There is circumstantial evidence that the hardship can stretch over a significant portion of the repayment term – You can prove this if you’re suffering from any physical or mental disability that impacts your productivity. Alternatively, you can also qualify if you can prove that you have received sub-par education or have maximized the income potential in your line of work.
    3. You tried all available efforts to repay in good faith before filing for bankruptcy – You can meet this requirement if you’ve been making on-time payments on your loans or if you’ve tried negotiating other repayment alternatives. Other considerations are your efforts towards cutting expenses (debt snowflake, avalanche, or snowball plans).

    Please be informed that as there is no defined explanation of what an undue hardship consists of, the result of your application is heavily dependent on the bankruptcy judge and your location.

    Still, the good news is that even lenders have to prove certain things if they want to claim the amount outstanding by meeting the “preponderance of the evidence” standard as well as establishing that your loans meet the guidelines of section 523(a)(8).

    Difficulty On Student Loans Discharge?

    The biggest difficulty is proving the hardship that you’ll face if you’re forced to repay the loan. This is determined by different tests, and the most common of them is the Brunner Test. Other tests include the ‘totality of circumstances’ test.

    Irrespective of the test, most courts set a high bar that is extremely difficult to clear, especially if you have a Federal student loan outstanding. Given there is no predefined explanation of undue hardship, applicants remain at the sole discretion of the bankruptcy court.

    In most cases, even after proving one or all aspects, borrowers may end up with-

    (a) partial discharge

    (b) full discharge

    (c) no discharge

    Can you file bankruptcy on private student loans?

    A private student loan, much like a federal student loan, can be discharged by meeting the specific requirements. Although it is possible, discharging a private student loan can have a devastating impact on your credit score.

    Chapter 13 And 7

    There are two ways to file a bankruptcy:

    - Chapter 13 – Also known as wage earners bankruptcy, this bankruptcy format lets you manage extremely large debts under a Federal court’s protection. You need a regular income to qualify and can help you clear secured loans by setting up a three to five-year repayment term. Besides these aspects, you must maintain an updated tax file and your unsecured debt total can’t exceed $394,725.

    - Chapter 7 – Also known as liquidation bankruptcy, this format helps clear off most unsecured loans. If you're a long way behind on your bills and don't have the means to afford monthly payments and living expenses, filing Chapter 7 bankruptcy could be a last resort to help you restore your finances. However, you may have to give up some of your possessions, and this will have a long-lasting negative impact on your creditworthiness.

    Bottom Line

    Student loan bankruptcy should be considered a last resort option to save yourself from debt burnout. We recommend trying other measures like a student loan deferment, a forbearance, or an income-driven repayment option before filing bankruptcy.

    It is extremely difficult to meet all of the relevant bankruptcy requirements and it also incurs additional expenses.

    Hence, checking out other repayment alternatives beforehand is generally the safest bet.