How Will Filing for Bankruptcy Affect Your Student Loans?

By Derek Prosser

Student loans are the second-largest type of debt, with about one and a half-trillion dollars owed by more than 44 million people. The numbers are astronomical. When you find yourself with crippling student debt, it can greatly impact your financial health and make it much harder to make ends meet. Unfortunately, student loans are not forgiven when you file for bankruptcy. If they were, every college graduate would be declaring bankruptcy. But while student debt generally remains even after filing for bankruptcy, there are some exceptions. 

Will Repayment Cause “Undue Hardship?”

One of the most common reasons that your student debt will be discharged in whole or in part after filing for bankruptcy is if paying the loans back would cause “undue hardship.” Undue hardship is determined based upon three factors, which are weighed under the Brunner Test.

  • Extenuating circumstances causing hardship. Saying that the current market is not good is not alone a reason for undue hardship. There must be additional circumstances that make paying it back that much more difficult. 
  • Likelihood of continuity. You must also be able to demonstrate that these circumstances won’t be changing anytime soon and instead are likely to go on for some time, causing your payments to be unduly difficult. 
  • Good faith efforts to make your payments. In order to consider undue hardship, you must show that you have provided good faith efforts to pay back the debt. This could be something as simple as showing that you attempted to create a payment plan. 

Before you attempt to prove undue hardship, it’s important that you see if there is anything else that you can do. This often includes talking to a lender about the possibility of income-based repayment plans or loan forgiveness. The court will look at you much more favorably if you showed that you did everything you could do. 

After filing for bankruptcy you must file for an Adversary Proceeding to prove that repayment would cause undue hardship, which would give you the opportunity to prove that your situation rises to a level of undue hardship.  While this isn’t impossible to prove, it is very difficult to discharge student loans in bankruptcy, especially if you have the ability to generate some amount of income.  

Student Loans In Chapter 13 Bankruptcy

Even though student loans aren’t likely to go away in bankruptcy, chapter 13 is a tool used by many of our clients to better manage their student loans.  If your monthly payment on the student loans is simply too high for your budget, a chapter 13 repayment plan can be used to reduce the payments towards those student loans for a 36 to 60 month period.  This gives our clients time to eliminate other debts, and improve their income, so they’re better prepared to pay their student loans after the conclusion of their case.

Toronjo & Prosser Law Helps Those Who Are Dealing with Bankruptcy 

It’s undoubtedly stressful to realize that you don’t have enough money, and even more stressful when you realize that filing for bankruptcy may be your best option. The process of filing for bankruptcy can be extremely complex and confusing. 

When you are going through the bankruptcy process, it’s in your best interest to consult with a knowledgeable and experienced Texas bankruptcy attorney. He or she can help you to identify important documents needed to file for bankruptcy as well as help you to avoid mistakes that could really cost you. 

At Toronjo & Prosser, our qualified Dallas Bankruptcy Attorneys can help you to navigate the process. To learn more or to schedule a free consultation contact us online or call us today!

About the Author
Derek Prosser understands that clients need help and need answers and that in order to properly address those concerns, clients need to deal with an attorney first and always, not just an assistant or paralegal.  By effectively counseling from the outset of a case, Toronjo & Prosser Law can anticipate and address potential problems before they arise, as opposed to when they’ve already surfaced (the “Counsel Later” approach), and, in the end, strive for a seamless representation.