I recently graduated from college with a lot of student loan debt. I was able to find a job but I can’t afford to pay back my student loans on my current salary. I expect my income to increase in the future but I can’t make my student loan payments right now. Can bankruptcy help me?
Student loans are difficult (but not impossible) to discharge (eliminate) in bankruptcy. While Chapter 13 bankruptcy can stop the collection activities and delay or reduce your payments for at least a few years, you might also have several options for dealing with your student loan debt outside of bankruptcy.
To learn more about how student loans are treated in bankruptcy, see our topic area on Student Loans and Bankruptcy.
Student Loans Are Difficult to Discharge in Bankruptcy
In order to discharge student loan debt in bankruptcy, you must prove to the court that paying back the debt will be an undue hardship on you. In most jurisdictions, to establish undue hardship you must show that:
- if you are required to pay back the loan, you can’t maintain a minimal standard of living with your current income and expenses
- your current financial circumstances are not likely to change for a significant portion of the repayment period, and
- you made a good faith effort to pay back the loan.
If you are a recent college graduate with a job and expect your earning potential to increase, it will be very difficult for you to prove undue hardship in bankruptcy court. This means that filing for Chapter 7 bankruptcy will typically not help you with your student loan obligations. But even if you can’t discharge your student loans, Chapter 13 bankruptcy might help you to delay or reduce your payments temporarily (discussed below).
For more information on how student loans are treated in Chapter 7 bankruptcy, see Student Loan Debt in Chapter 7 Bankruptcy.
Talk to a Bankruptcy Attorney
While it’s still very hard to discharge student loans in bankruptcy, courts are becoming more lenient. As a result, consider talking to a knowledgeable bankruptcy attorney in your area to learn whether your individual circumstances might have a chance of qualifying for undue hardship in your jurisdiction.
Chapter 13 Bankruptcy Can Delay or Reduce Your Payments
Chapter 13 bankruptcy allows debtors to reorganize and pay back a portion of their debts through a three- to five-year repayment plan. The moment you file your case, an automatic stay goes into effect that stops most creditors (including student loan lenders) from collecting their debts.
The amount of your monthly Chapter 13 plan payment depends primarily on the types of debt you have, the amount of property you own, and your income and expenses. If you don’t make a lot of money or own a lot of assets, your plan payment will typically be less than your monthly student loan obligations. Because your lender is prohibited from collecting your regular student loan payment during bankruptcy, you can use Chapter 13 bankruptcy to delay or reduce your payments until you make enough money to afford your regular payments.
To learn more about how Chapter 13 bankruptcy can help with student loans, see Student Loans in Chapter 13 Bankruptcy.
Alternatives to Bankruptcy
If you are a recent college graduate struggling with student loan debt, there may be several alternatives available to you other than bankruptcy. For example, you might be able to take advantage of programs or options offered by the federal government or your private lender to defer payments on a temporary basis. Or you might qualify for one of the flexible repayment plans where your payment is based on your income (these are for federal loans only; private loans are not eligible).
To learn about these, and other options, see our Student Loan Debt topic.