Can You File for Bankruptcy on Your Student Loans?

IIf you feel like you’ve run out of options for paying your student loan debt, you may be considering bankruptcy. But is that even possible? 

Filing for bankruptcy on your student loan isn’t easy, and it doesn’t always work. You can file for Chapter 7 or Chapter 13 bankruptcy. Note that neither of these options wipes away student loan debt like they do other personal debts, such as credit card debt or personal loans.

Not a magic bullet

If a Chapter 7 bankruptcy is approved, you may be able to plead “undue hardship” on your student loans. This may lead to a discharge of some or all of your student loan debt.

In order for this to happen, you must file an Adversary Proceeding (a lawsuit within bankruptcy court). You have two options for pleading your case: hardship and deceptive practice.

Hardship: The court determines hardship based on your health, age, income, expenses, and the length that your income problems are likely to persist.

Deceptive practice: If you attended a for-profit trade school that intentionally defrauded you, a discharge of your student loan debt through bankruptcy may be possible. You will need to prove there was a breach of contract, deceptive practices, or other similar problems.

Consequences of bankruptcy

Filing for bankruptcy should be a last resort. Here are some of the reasons why:

• Bankruptcy becomes public record, and is available to anyone.
  
  
•  A bankruptcy stays on your credit report for up to 10 years. This can prevent you from obtaining new lines of credit for things like credit cards, mortgages, or car loans. It may also affect your future employment prospects.
  
  
• Filing for bankruptcy requires you to pay court and other legal fees.

Options other than bankruptcy

You have options other than bankruptcy. Here are a few ways to get relief from high monthly student loan payments:

Refinancing

When you refinance your student loans, you can save money in the short-term by lowering your monthly payments.

By swapping out your existing loan or loans for a new loan with a lower interest rate, you’ll be able to direct more of your monthly payment towards the principal and hopefully, pay down your debt faster. Both federal and private student loans are eligible for refinancing through a private lender.

Consolidation

A federal Direct Consolidation Loan can combine all your federal loans into one loan. While this doesn’t lower your interest rate, it does lower your payments since you can extend the loan term (i.e., pay less every month over a longer period of time).

You can also consolidate private loans. But when you do, you’re really just refinancing several loans into one new loan with a lower interest rate.

Loan forgiveness programs

Certain federal loans are eligible for the Public Service Loan Forgiveness Program (PSLF) if you work in a qualifying public-service job and have remained current with your loan payments.

If you’re eligible, this program forgives the remaining balance on your federal Direct Loan after 10 years of payments.

Income-driven repayment plan

If you have federal loans, you can choose one of the four repayment plans that are driven by your income rather than your loan balance. If you qualify, your monthly student loan payment is set at an amount based on your income and family size.

To find out how much you could save from refinancing, check out this Student Loan Refinancing Calculator.