Can Private Student Loans Ever Be Discharged Through Bankruptcy?
Student loan debt is a growing problem in the United States. The current debt tally recently exceeded $1.5 trillion shared by 45 million student loan borrowers according to LendEDU.
That’s a huge number by itself. It’s made more problematic by the fact that the national federal default rate exceeds 11 percent. While many struggle with their federal loans, private student loan borrowers can find themselves dealing with a whole new set of issues.
Private student loans are not as forgiving as federal loans. They come with higher interest rates and are not eligible for certain federal benefits such as student loan forgiveness or income-driven repayment plans.
On top of all that, private student loans are much harder to have discharged in bankruptcy compared to federal loans. As borrowers find themselves in a pinch during bankruptcy, they may ask: is it even possible to discharge private student loans in the first place?
How Private Student Loans Are Addressed in Bankruptcy
You may have heard that student loans can never be discharged, even if you file for bankruptcy. This isn’t entirely true. It is possible to have your private student loan debt discharged; however, it’s unlikely which may explain the myth.
In 2005, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act which addressed the discharge of student loan debt in bankruptcy. To start, private student loans are addressed differently than federal loans.
To successfully discharge your private student debt, you must prove that repaying your student loans would cause “undue hardship.” To do this, you’d have to hire an attorney and file a separate lawsuit.
What is Undue Hardship?
The 2005 legislation doesn’t explicitly define undue hardship. Unfortunately, this leaves it up to the courts to decide whether a borrower meets the criteria. Outcomes can vary considerably case by case.
However, most courts, but not all, use the Brunner Test to evaluate undue hardship. Here are the following criteria used to determine undue hardship:
- You must prove that making your student loan payments would prevent you from meeting a minimum standard of living.
- Not only are you unable to meet a basic standard of living, but your current circumstances must also make it unlikely that your financial situation will change anytime soon.
- You must prove that you’ve made an effort to repay your student loan debt in good faith.
How to Prove Undue Hardship
As the one filing for bankruptcy, it’s your responsibility to prove that you are facing undue hardship. The best way to do this successfully is by providing the court with meticulous financial records.
You’ll need to provide details for monthly bills and how much you earn. You’ll also need to demonstrate that you put forth every effort to repay your student loan debt despite being unsuccessful.
Print out a history of your loan payments and any email correspondence you had with your lender. This will go a long way toward demonstrating that you genuinely tried to repay your loans.
Try to document any extenuating circumstances that made it difficult to repay private student loans. For instance, a medical emergency and resulting bills could be an example; having a medical condition that renders you unable to work is another example.
Even if you are able to prove undue hardship, this doesn’t mean your loans will be automatically discharged. The court could decide to discharge part of your student loans or simply lower the interest rate.
While it’s possible to have your student loan debt discharged in bankruptcy, it’s unfortunately unlikely.
It is technically possible under the law to discharge private student debt, but you must prove beyond any reasonable doubt that it’s impossible to pay off your loans. This can be difficult on a case-by-case basis, but it can be done if you are prepared.
If you do pursue bankruptcy, make sure to continue trying to make monthly payments. You must show you are making an effort to pay them back. Furthermore, if you stop paying your loans and the discharge request is denied, you’ll have to deal with all the interest that accrued, not to mention the extra damage to your credit score.