Discharging Student Loans in Bankruptcy Proceedings

As bankruptcy relief attorneys here in Florida, we frequently receive questions surrounding whether student loans can be discharged in bankruptcy. In a nutshell, the courts can agree to discharge student loans in bankruptcy proceedings, but you first have to prove that they are causing you undue hardship. This includes both federal and private student loans, although they involve different processes. Therefore, the answer to this question is yes, but it is a complicated process that is not guaranteed, warranting working with an experienced attorney in order to ensure that it is done correctly the first time through.

Federal Loans

Federal student loans are all those held by the U.S. Department of Education, which typically includes Direct Loans, Federal Family Education Loan Program, and Perkins loans. With the assistance of your bankruptcy attorney, you can file a petition for an adversary proceeding in both Chapter 7 and Chapter 13 bankruptcies. As part of this process, you have to demonstrate that the loans are currently causing you or will cause you undue hardship. While this determination is up to the court, there are several factors that it will take into account, such as whether:

  • You can maintain a minimal standard of living if forced to repay the loans
  • The hardship is expected to continue for a significant amount of time
  • You have made good-faith efforts to repay your loans before filing for bankruptcy

Some demonstrate this to the court by producing evidence that they work regularly, live on a frugal budget, and tried to make loan repayments based on a plan but were still unable to make ends meet. Courts grant student loan discharges for undue hardship for almost 40% of debtors who go through the adversary proceeding process.

If the court agrees, Federal Student Aid typically offers you relief in one of three ways:

  • A change of terms of your loans so that they are easier to pay, such as reducing the interest rate
  • A full discharge of your loans, meaning all collection activity ceases, and you do not have to repay any portion back
  • A partial discharge of your loans, meaning you will still have to repay a portion back

Private Loans

Private student loans can also be discharged in bankruptcy cases, and sometimes without having to provide undue hardship, but instead can be discharged as part of a normal bankruptcy proceeding, like other consumer debts. Still, there are portions that cannot be discharged in a normal bankruptcy proceeding and must follow the same path that discharge of federal student loans go via undue hardship through an adversary proceeding.

There are separate conditions that apply when it comes to private student loans qualifying for the undue hardship standard, including the following:

  • The Loan is used to attend a “qualified educational institution”
  • The loan must be used exclusively to pay for education expenses, but this not only can include tuition but also room and board, fees, equipment, books, supplies, transportation, and other related expenses
  • The loan must be paid within 90 days before or after an academic period or within a reasonable time for the payment of educational expenses
  • The student must be enrolled in school at least half-time when they received the loan and in courses leading to a degree
  • The student cannot be undocumented or incarcerated (when they received the loan)
  • The student must have been eligible for Higher Education Act Title IV funding at the time they received the loan
  • The borrower must be a taxpayer and either be the student themselves, someone who claims them as a dependent, or their spouse

Unless all of these conditions are met, the private student loan is treated like any other debt in bankruptcy; if they are met, then the private student loan can be discharged once the borrower proves undue hardship, similar to a federal student loan. Still, there are a few types of private loans that are not subject to the undue hardship standard, such as:

  • Private bar study loans
  • Fees and living expenses for a dental or medical residency
  • Any funds provided in excess of the cost of attendance

Jacksonville Bankruptcy Lawyers

If you are struggling to repay your student loans, do not hesitate to contact the Adam Law Group today to schedule a free consultation and find out how to obtain some relief. We are here to help.