Bankruptcy and Student Loans

Bankruptcy May Not Always Be the Solution for Student Loans

Absent proving undue hardship, student loans are not dischargeable through bankruptcy.

Overview

If you are considering filing for bankruptcy because a student loan(s) makes up most of your debt, understand that you will have to file a separate adversary proceeding and prove repayment of your student loan(s) would cause an undue hardship.

Accordingly, you may still have to pay back your student loan(s)—even after bankruptcy.

Here are a few of the many things to discuss with your bankruptcy attorney before you file.

• The Consequences of Bankruptcy

  Bankruptcy can reduce or eliminate many forms of debt. Depending on which type of bankruptcy you file, you may have to follow a court-ordered payment plan or undergo a liquidation of nonexempt assets.

  Bankruptcy may also remain on your consumer report for up to 10 years, which may impact your ability to:

  • Get a job
  • Rent an apartment or buy a home
  • Get credit or borrow money
  • Get insurance

• Types of Personal Bankruptcy

  The two most common types of personal bankruptcy are Chapter 7 and Chapter 13.

  In Chapter 7 bankruptcy, your nonexempt assets are liquidated, or sold, to pay your creditors. Any remaining unsecured debt, like credit card debt, is usually discharged. But in many cases, your student loan(s) will remain and must be repaid.

  A Chapter 13 bankruptcy does not force you to liquidate your assets, but it does require you to repay all or a portion of your debts in installments over a period of time specified by a court-ordered bankruptcy plan.

  If you successfully complete your Chapter 13 bankruptcy plan, the court discharges most or all of your remaining unsecured debt—but not your student loan(s). Your student loan(s) will remain absent the court determining in a separate adversary proceeding that repayment of the student loan(s) would be an undue hardship.

• Why Claiming "Undue Hardship" May Not Discharge Student Loans

  You may have read that student loans may be discharged when paying them would place an "undue hardship" on the borrower. But Congress intended that discharge for undue hardship be reserved for individuals facing more than the financial hardship that accompanies all bankruptcies. So while you may claim undue hardship based on any number of contributing factors, it is up to the bankruptcy court to determine if your situation meets the legal standard set by Congress. Please consult with a bankruptcy attorney to discuss your options.

• Understanding the Impact on Your Consumer Report

  Bankruptcy can remain on your consumer report for up to 10 years. This may impact your eligibility for Title IV federal financial aid. Obtain a free copy of your consumer report at www.annualcreditreport.com.

  You can dispute any entry on a consumer report by filing a dispute with the national consumer reporting agencies.

  • Equifax
  • Experian
  • TransUnion
  • Innovis, Inc.

  You may also dispute the item directly through the company that provided the information to the national consumer reporting agencies.

• Making Decisions about Bankruptcy

  Before making any decisions about bankruptcy, consider consulting an attorney or financial advisor to get an objective assessment of whether bankruptcy is the solution for you.

  Remember, if you are considering filing for bankruptcy because most of your debt is because of your student loan(s), you may want to consider other alternatives.

  If your student loan(s) is not in default, and you have not filed for bankruptcy, some of your options may include:

  • Seek an alternative repayment plan, which may have lower payments
  • See if you are eligible for a deferment
  • Temporarily postpone your payments through forbearance
  • See if you qualify for loan forgiveness
  • Consolidate your loans

  For more information about getting assistance, including tools that can help you review your finances, visit our Preventing Default section.

  If you are in default, and you have not filed for bankruptcy, you may want to look into:

  • Loan rehabilitation
  • Default repayment plan
  • Loan consolidation

  For more information about managing a defaulted loan(s), visit our Resolving default section.

  No matter what you decide to do, keep your loan holder(s) informed.

  If ECMC holds your loan(s), call us at 888-363-4562. If you don't know who your loan holder(s) is, go to the Federal Student Aid (FSA) website, which is the central database for all federal student loan information.

• Getting Additional Help

  If you filed for bankruptcy, your loan holder(s) may no longer "hold" your student loan(s).

  If ECMC holds your loan(s) and you have questions about student loans in bankruptcy, please contact us at 888-363-4562.

  If you don't know who your loan holder(s) is, go to the Federal Student Aid (FSA) website, which is the central database for all federal student loan information.

  Please note: If you wish ECMC to discuss your private information with someone other than you or your attorney, please complete and sign a Borrower’s Authorization to Disclose Information giving your consent and mail the form directly to us at:

  ECMC
  P.O. Box 16408
  St. Paul, MN 55116-0408