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 hardshipUndue hardshipA determination with a bankruptcy necessary to discharge student loans..

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 assetsNonexempt assetsIn bankruptcy cases, this refers to assets that the individual filing for bankruptcy is required to surrender to the bankruptcy estate. Common examples of nonexempt assets include tax refunds, bank accounts, jewelry, antiques and collectibles, and other personal property..

  Bankruptcy may also remain on your consumer reportConsumer reportA consumer report is any written, oral, or other communication of any information by a consumer reporting agency bearing on a consumer's credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living which is used or expected to be used or collected in whole or in part for the purpose of serving as a factor in establishing the consumer's eligibility for (a) Credit or insurance to be used primarily for persona, family, or household purposes; (b) Employment purposes; or (c) Any other purpose authorized under section 1681b of the Fair Credit Reporting Act. 15 U.S.C. § 1681a(d). 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 assetsNonexempt assetsIn bankruptcy cases, this refers to assets that the individual filing for bankruptcy is required to surrender to the bankruptcy estate. Common examples of nonexempt assets include tax refunds, bank accounts, jewelry, antiques and collectibles, and other personal property. are liquidated, or sold, to pay your creditors. Any remaining unsecured debt, like credit card debt, is usually dischargedDischargeA court order in bankruptcy that releases an individual's personal liability on certain debts. Individuals who file for bankruptcy and meet the requirements of their specific case can receive a discharge order from the court for debts considered "dischargeable," a classification that does not include student loan debt absent in undue hardship determination made by the court. This discharge order prevents creditors from taking any action to collect the discharged debts.. 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 dischargedDischargeA court order in bankruptcy that releases an individual's personal liability on certain debts. Individuals who file for bankruptcy and meet the requirements of their specific case can receive a discharge order from the court for debts considered "dischargeable," a classification that does not include student loan debt absent in undue hardship determination made by the court. This discharge order prevents creditors from taking any action to collect the discharged debts. when paying them would place an "undue hardshipUndue hardshipA determination with a bankruptcy necessary to discharge student loans." 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 reportConsumer reportA consumer report is any written, oral, or other communication of any information by a consumer reporting agency bearing on a consumer's credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living which is used or expected to be used or collected in whole or in part for the purpose of serving as a factor in establishing the consumer's eligibility for (a) Credit or insurance to be used primarily for persona, family, or household purposes; (b) Employment purposes; or (c) Any other purpose authorized under section 1681b of the Fair Credit Reporting Act. 15 U.S.C. § 1681a(d). for up to 10 years. This may impact your eligibility for Title IV federal financial aidTitle IV federal financial aidStudent financial assistance programs administered by the U.S. Department of Education, as specified by the Higher Education Act of 1965, Title IV. The programs provide for postsecondary education grants and loans, including those issued under the Federal Family Education Loan (FFEL) and Federal Direct Loan Programs.. 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 defaultedDefaultStudent loan default is a state of delinquency on student loans occurring when a borrower has not made a payment or payment arrangements on the student loan debt. Federal Family Education Loan Program (FFELP) student loans are considered to be in default after 270 consecutive days of missed payments; default under the Direct Loan Program is 330 consecutive days of missed payments. (Please note: As of July 1, 2010, new federal student loans are originated only through the Direct Loan Program.) loan(s), visit our Resolving default section.

  No matter what you decide to do, keep your loan holder(s)Loan holderThe institution that holds the title to a loan and therefore has a right to collect on that loan. The holder of Federal Family Education Loan Program (FFELP) loans may be a lender, a guaranty agency, or the federal government. The holder of Perkins loans may be a school or the federal government. The holder of Federal Direct Loan Program loans is the federal government. 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 bankruptcyBankruptcyA legal status that grants individuals protection from creditors. Those who file bankruptcy can have the court discharge some or all of their debt (generally, student loans are not considered a dischargeable debt). The process varies depending on whether a Chapter 7 or Chapter 13 bankruptcy is filed., 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 (PDF) giving your consent and mail the form directly to us at:

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