If you file for Chapter 7 or Chapter 13 bankruptcy and have delinquent student loan debt, your student loan servicer or any debt collection agency trying to collect your loans is barred from engaging in collection efforts during your bankruptcy case. However, if you cannot discharge your student loans in bankruptcy, the student loan creditor can resume collection of your student loans once your bankruptcy case is over.
Discharging Student Loans in Bankruptcy
Student loan debt will not be wiped out in bankruptcy unless you can demonstrate that to repay it would cause you and your dependents undue hardship. This standard is a difficult, although not impossible, one to meet.
The Brunner Test
All courts, except those within the First and Eighth Circuit Courts of Appeal, use the Brunner test when determining if a debtor meets the undue hardship standard. In order to satisfy Brunner you must meet all of the following three conditions:
- Poverty. Based upon your current income and expenses, you cannot maintain a minimal standard of living for yourself and your dependents if you are forced to repay your loans.
- Persisitence. Your current financial situation is likely to continue for a significant part of the repayment period.
- Good faith. You have made a good faith effort to repay your student loans.
(Learn more about discharging student loans in bankruptcy with the Brunner test.)
Discharging Student Loans in the First and Eighth Circuits
The Eighth Circuit Court of Appeals has a slightly different test in which it looks at the totality of circumstances. Case law has set forth a number of factors that courts in the Eighth Circuit consider. Several of those are different, and slightly less severe, than those in Brunner. The First Circuit Court of Appeal has allowed its courts to choose which test to use, Brunner or totality of the circumstances or something else. But most of its courts use the totality of the circumstances test.
Procedure to Discharge Student Loans
In order to discharge your student loans, you must bring a separate action within your bankruptcy case – called a Complaint to Determine Dischargeability. In the complaint, you ask the judge to rule that your loans be wiped out in bankruptcy. Student loan servicers tend to fight hard against these actions – so be prepared to conduct discovery and present witnesses and evidence at the hearing. You’ll most likely need an attorney to assist you.
Bankruptcy’s Automatic Stay Applies to Student Loan Collection
When you file for bankruptcy, something called the automatic stay kicks in. The automatic stay prohibits most creditors from continuing with collection efforts during your bankruptcy case. But what if it’s clear that your student loans won’t be discharged at the end of your bankruptcy? It doesn’t matter – the automatic stay applies to student loan debt collection, even if those debts are nondischargeable.
This means that once you file for bankruptcy, your student loan servicer, or any debt collection agency it hires, cannot send you collection notices, garnish your wages, attach your bank account, sue you, or do anything else while your bankruptcy case is pending.
What Happens After My Bankruptcy?
If your student loans are not discharged in your bankruptcy case, the student loan servicer or debt collection agency can resume collection efforts once your case is over.