When you’re struggling to pay back your student loans, what’s your next step? With Americans owing $1.4 trillion in student debt, you’re not the only one asking this question. If your bills are piling up, you might even consider bankruptcy. The question is, does bankruptcy clear student loans? After all, discharging your student loans could mean saving thousands of dollars in repayment, depending on how much in loans you have left, and it could give you the financial freedom to get back on your feet.
Can You File Bankruptcy on Student Loans?
So, is bankruptcy a possible option with student loan debt when you would otherwise not be able to make payments? Yes, but it can be difficult. Discharging your student loans through bankruptcy requires proving to the court that you would suffer from “undue hardship” if forced to pay.
While this may sound like you—honestly, who doesn’t see that monthly payment as an undue hardship?—you still need to think twice before contacting your nearest bankruptcy lawyer. If it were easy to use bankruptcy to clear student loan debt, there probably wouldn’t be millions of Americans still making payments.
What does it mean to declare bankruptcy?
Bankruptcy is a way of clearing your debts—which adversely affects your credit—through the court system, whose job is to sort through your assets and forgive what you’re unable to pay. Most of the time, this means giving you a clean slate.
Assets are typically seized if they have some value, to pay off some debts, but unless you have property of considerable worth (like some original Van Goghs lying around), your possessions might not be up for seizure. Rules vary from state to state on what is a seizable asset. People looking to discharge student loans must file for Chapter 7 or Chapter 13 bankruptcy. The first is designed for low-income individuals with little-to-no assets, and the second is for higher earners looking to ameliorate their debt.
How to File Bankruptcy on Your Student Loans
So if 4.6 million Americans with student debt have deferred payments, why haven’t they declared bankruptcy? Simple: It’s extremely difficult to qualify for bankruptcy. After all, if that kind of legal loophole existed for student loan debt, there would be nothing to stop people from graduating college and then immediately declaring bankruptcy. Most, but not all, courts use the ‘Brunner Test.’ The qualifications for the Brunner Test are:
1. You and your dependents cannot maintain a minimal standard of living if you’re forced to keep paying your student loans. This is based off your income and expenses.
2. Additional circumstances exist indicating that your challenges are likely to persist for a significant part of your student loan repayment period.
3. You have made good-faith efforts to repay your loans.
With that criteria, many are unlikely to qualify for bankruptcy, unless your case is extraordinary. For example, if you are unable to work because of a permanent disability, you may qualify.
What alternatives will help me pay off my student loan debt without declaring bankruptcy?
Fortunately, there are alternative options to declaring bankruptcy. For short-term solutions, deferring your loans or going into forbearance, unlike declaring bankruptcy, does not negatively affect your credit.
If you are looking to lower your monthly payments on federal loans, you may be eligible to switch to an income-driven repayment plan, which ties your monthly payments to your income. If your income is low enough, this could bring your payments down significantly, though interest may still accrue depending on the plan. If your loans are private, remember, you can negotiate: Call your creditor and ask for additional payment options. Lenders would rather receive a smaller sum of money from you than nothing, so it’s in their best interest to work with you.
Deferring loans and forbearance are ultimately short-term solutions. If you’re looking for a long-term solve to your reduce student loan debt repayment, refinancing may be worth looking into. Refinancing your student loans means transferring your debt to another lender, with new terms and new (ideally, lower) interest rates.
Some lenders offer refinancing rates lower than the federal rates depending on your financial standing. If you have good credit, refinancing could be a smart long-term solution. If you’re looking to refinance, make sure you do your research and see if you can find competitive rates with a lender you trust.
Is your student loan debt holding you back? Look into refinancing your student loans with SoFi, so you can start getting in control of your debt.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website on credit.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment, Income Contingent Repayment, or PAYE.
SoFi Lending Corp. is licensed by the Department of Business Oversight under the California Financing Law, license number 6054612.