Student Loan Debt

Bankruptcy discharge rarely releases certain debts (referred to as non-dischargeable debts) whether you file under Chapter 7 or Chapter 13. Student loans can be very difficult to pay off and can add a significant burden to someone who has accumulated a lot of other kinds of debt as well. Student loan creditors can garnish a debtor's wages without first going to court. Moreover, these claims may be used to offset a debtor's tax refund. They are also subject to interest and penalties if not paid as required, resulting in increases in the total student loan debt an individual owes.

A Chapter 13 will typically not discharge (eliminate) your student loans. However, it can be used to obtain an affordable monthly payment, and to also stop the penalties from accruing each and every month. And you do not need your individual student loan creditor(s) to agree to the reduced payment you are proposing as part of your bankruptcy. Instead, the payment is a function of what you can afford to pay based on your monthly disposable income.

Say for example that your required monthly student loan payment "outside" of your Chapter 13 is $750/month. If your disposable income shows that your plan payment only needs to be $200/month, that is all you would need to pay each month. And while the interest on your balance would continue to accrue as it did before you filed your Chapter 13, the penalties, which are often greater than the monthly interest, would cease while your case is pending.

It is rare for student loans to be discharged, and less than one tenth of one percent of debtors who file for bankruptcy even try to have their student loans discharged through bankruptcy. Under certain circumstances it may be worth trying.

Undue Hardship

The only way to discharge student loans is to prove that paying them back is an "undue hardship." Courts have interpreted this to mean there is a reason outside the debtor's control, such as a medical reason, why he or she cannot pay back the loan.

Proving an undue hardship is quite difficult. Underemployment, for example, is not a good enough reason. But circumstances such as severe disability may qualify you for this route. A debtor who wishes to ask the court to dismiss a student loan must file a separate action called a “Complaint to Determine Dischargeability of a Debt.”

Different bankruptcy courts use different tests for "undue hardship," but what is common among them is how reluctant they are to discharge student loans. Some courts use what is called the Brunner Test. In that test, you can discharge a student loan if you meet the following criteria:

(1) You are impoverished such that you cannot maintain a minimal standard of living if forced to repay the loan,

(2) You are stuck in your current financial situation for a significant part of the repayment period, and

(3) You have made a good-faith effort to repay your student loans.

Other courts look at all relevant factors to decide whether it is an undue hardship for you to repay your loans. A bankruptcy court will consider many factors, such as poverty or a good-faith effort to repay the loan over a long period, or long-term disability.

Effect of Chapter 13 bankruptcy on Student Loans

The debt reorganization that Chapter 13 bankruptcy provides may be helpful if you are dealing with overwhelming student loans in addition to such things as credit card or medical bill debt. If you are not able to discharge the student loan debt fully, you can at least delay or reduce the monthly loan payment during the debt repayment plan period of three to five years.

As mentioned in the overview of Chapter 13 bankruptcy, your debt is divided into three kinds. Student loans are treated similarly to priority loans (like back taxes and alimony) in that they have to be paid back in full. However, a debtor's individual plan can determine the size of his or her student loan payments during the bankruptcy period. As discussed above, that amount may be smaller per payment than what is owed outside the bankruptcy period.

Once the bankruptcy period is over, however, you will have to continue to pay your remaining student loans. The obligation will not be extinguished.

Dealing with student loans in a bankruptcy proceeding can be complex and time-consuming. While it is hard to prove "undue hardship," consultation and retention of an experienced Los Angeles bankruptcy attorney, may help ensure that you obtain the most favorable outcome possible with respect to your student loans. Contact Attorney Devin Sawdayi at 310-475-9399 or via the online form for help with this process.