Today’s guest post is from Good Nelly. Founder of MyWayOfViewing and a partner of DebtConsolidationCare, Good has written about personal finance for years and for a large number of publications. Good is knowledgeable on a wide variety of personal finance topics but has especially focused on debt reduction and debt settlement. That’s why I asked her if she would be willing to compose an article that answered the question, “Can you get student loans discharged in bankrupcty?” She did a great job answering this question and I hope it’s a help to you!
Can you get student loans discharged in bankruptcy? Unfortunately, in most cases, the answer is no.
The answer can be “yes,” but only if you pass something called the “Brunner test,” which is explained below.
The Brunner Test: What It is and How it Works
The Brunner test measures whether or not you’re actually experiencing financial hardship for which you can’t repay your student loan debt. To qualify for student loan discharge, you have to prove that you’re facing undue hardship.
The bankruptcy court usually looks at these factors to determine whether or not you’re facing financial hardship:
- Is there any chance that your present financial hardship will continue for quite a few years?
- Will it be possible for you and your dependents to maintain a minimal standard of living if you have to repay the student loan?
- Have you tried to repay your student loans to some extent before you opted for filing bankruptcy?
Along with this, the bankruptcy court will also review whether or not you’ve created this financial hardship intentionally to get a discharge from your student loan debt.
It is very difficult to get student loan discharge approval from the bankruptcy court. In most cases, the court may direct you to repay your student loans through several income-driven repayment programs or to opt for deferment or forbearance.
If you are one of the few who is able to demonstrate qualifying financial hardship through the Brunner Test, the court systems could:
- Grant a full discharge from your student loans
- Discharge a portion of your student loans
- Lower the interest rate on your student loans
And, even if you get a partial or full discharge from your student loans, your credit score will still take a hit. So, whenever possible you should try to avoid bankruptcy and implement a strategy to repay your student loans.
How to Pay Off Student Loans Without Filing for Bankruptcy?
How will you repay your student loans when you’re facing financial hardship? Let’s discuss some options.
1. Opt for an Income-Driven Plan.
One of the best ways to avoid bankruptcy and repay your federal student loans is to opt for an income-driven repayment plan. Examples of income-driven plans include:
- PAYE (Pay As You Earn)
- REPAYE (Revised Pay As You Earn)
- IBR (Income-Based Repayment)
The program you will choose will depend on your family size and several other factors.
After 20 to 25 years of on-time payments on these income-driven programs, the remaining amount on your federal student loan can be forgiven. But you will have to pay a tax on the forgiven debt amount.
2. Request for Deferment or Forbearance.
If your financial hardship is temporary, you can request for deferment or forbearance to stop paying your student loans for some time.
If you get approval, you can either reduce or stop your student loan payment for a certain period and thus avoid defaulting on the loan.
What is Deferment?
If you qualify for student loan deferment, you won’t have to pay the interest on specific loans like Federal Perkins loans, Direct Subsidized loans, and the subsidized portions of FFEL Consolidation and Direct Consolidation loans.
But, you will have to make interest payments on other types of student loans.
What is Forbearance?
If you qualify for forbearance, you’ll have to continue making the interest payments on your federal student loans.
However, you can pay the interest or elect to get it added to the principal amount. In the latter case, you’ll have to pay off at the end of the deferment or forbearance period.
3. Pay Off Your Other Debts.
This may sound a bit tricky but it helps!
If you have multiple debts to pay off, you can opt to repay your high-interest credit card debts first. Once you pay them off, you will have extra cash in your hand to make student loan debt payments.
How will you repay your credit card and other unsecured debts?
Well, you can opt for DIY strategies or professional debt relief options — whichever suits you the best.
If you’re able to repay your unsecured debts in full, you can opt for consolidation. If your financial condition doesn’t permit you to do so, debt settlement could be an option as well.
4. Refinance or Consolidate Your Student Loans.
Refinancing your student loans or taking out a consolidation loan could save you money.
- In the case of loan consolidation, you take out a loan that is enough to repay all your existing debts.
- Hopefully, you’ll be also offered a better interest rate than you currently have.
Consolidated loans replace your multiple loans with one. This could also help you better manage your student loans along with the consolidation loan and, thus, help you avoid bankruptcy.
Do keep in mind that refinancing federal student loans has a lot of drawbacks that need to be weighed carefully. Read through our 6 Critical Questions to Ask Before Refinancing Your Student Loans to familiarize yourself with all of the pros and cons.
Conclusion:
Student loans are one of the few forms of debt that are incredibly difficult to get discharged through bankruptcy. Except for in extreme circumstances, bankruptcy will not be a viable option.
Putting together a monthly budget and a comprehensive student loan repayment plan is usually the better choice for borrowers who want to get out of student loan debt as soon as possible.
