One of the most common questions debtors ask is, “Can I discharge student loans through bankruptcy?” Given that several months ago the Federal Reserve Bank of New York reported for the first time in history the student loan 90 day delinquency rate had moved above 11% and now exceeds $965 billion (which is more than credit card and auto loan debts) there are thousands of students who have this question.
Discharging Student loan debt in bankruptcy
So can you discharge your student loan debts? It is possible to discharge federal student loan debt through bankruptcy, but it is very difficult. First, you will have to file a formal complaint with the bankruptcy court, called a Complaint to Determine Dischargeability and then prove that the loans will cause “undue hardship.”
Proving undue hardship, however, can vary between courts, and many courts are reluctant to discharge student loans. One of the most common tests the courts will use to determine undue hardship is called the Brunner test.
The court will review three factors: poverty, persistence and good faith. More specifically, the courts will review your current expenses and income and determine if you can continue to provide an adequate standard of living for you or your family if you repay the loans, they will determine if your financial situation is likely to improve any time in the future, and finally, they will determine if you have attempted to repay your loans in the past.
No discharge, steps to repay student loans
If the court decides they will not discharge your loans you will need to find a way to repay them. Some graduates, who are overwhelmed with student loans debts, may have to move back to their parent’s home; others may have to find a second job.
A recent article in USA Today offered several strategies for repaying student loans. The first suggestion was to use your IRS tax refund you receive from the federal government. But if you decide to apply your tax refund to your student loan experts have offered several strategies to make sure your money works for you.
For instance, although many debtors may decide to apply the payment to their largest student loan, experts suggest it may make more sense to apply the refund to the student loan with the highest interest rates because these loans are costing you more.
Next, don’t just send the extra payment with your regular student loan payment, but call the lender to ensure the extra money is applied to the principal loan payment rather than the interest payment. Experts also suggest that although repaying student loan debts is a priority, if you do not have an emergency fund it could also make sense to use part of the refund for this purpose.
Experts suggest creating an emergency fund before repaying debts
Finally, student loans may not be your only debt obligation. There are other types of debts such as high credit card debts that also need to be repaid.
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