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When and How to File Bankruptcy for Student Loans

Many student loan borrowers struggle to make their monthly payments, which may prompt some to wonder whether they can file for bankruptcy for student loans.

A recent study by LendEDU, an online marketplace for student loans, indicated that 32% of people filing for Chapter 7 bankruptcy had student loan debt, and that almost half of their total debt came from student loans. It's commonly believed that student loans can't be discharged in bankruptcy, but that's a myth. It can be done, so why aren't more borrowers pursuing it? Here's what to know.

Should I File for Bankruptcy?

Filing for bankruptcy is a very serious matter and shouldn't be taken lightly. You should only consider bankruptcy when you've exhausted all of your other options.

If keeping current on your student loans means you can't afford basic necessities, you should consult with an experienced attorney, one who knows that a student loan discharge is possible after declaring bankruptcy.

What Are Some Alternatives to Bankruptcy Filing?

Before filing for bankruptcy, you should explore income-driven repayment plans. They could significantly reduce your monthly payment based on your income and family size, sometimes even to $0.

If your payments are still too high and you don't meet the requirements for discharging student loans in bankruptcy as outlined below, don't hesitate to file for deferment or forbearance. These options allow you to temporarily stop making your federal student loan payments or reduce the amount you pay.

[Read: 4 Questions to Ask Before Requesting a Student Loan Deferment, Forbearance.]

Filing for deferment and forbearance is free and typically only requires you to fill out a form and provide proof of income. While each of these comes with its own pros and cons, they are your primary options for providing financial relief from your student loans.

Can My Student Loans Be Discharged in Bankruptcy?

To successfully have your student loans discharged in bankruptcy, you will need to prove that repaying them would cause an undue hardship. Unfortunately, "undue hardship" is not a specified term, although the Department of Education has recently made an effort to establish a concrete definition.

[Read: What to Know About Possible Bankruptcy Rule Changes for Student Debt.]

Until then, each situation is up to each court's discretion. That's where the Brunner test, used by most bankruptcy courts, comes in. The Brunner test could be used to determine if a borrower's student loans are too much to afford, making them able to be discharged in bankruptcy. To pass the Brunner test, you must prove you meet the following three criteria:

1. Your income and expenses do not currently allow you to continue a basic or minimal standard of living for you and your dependents if you're forced to repay your student loans.

2. This financial situation will, most likely, continue for a majority of your student loan repayment period.

3. You have made good faith efforts to try to repay your student loans before filing for bankruptcy.

Filing for bankruptcy is no walk in the park and not all of your debt could be wiped out. There are two common options for consumer bankruptcy, Chapter 7 and Chapter 13, and both of them can have a serious impact on your credit score. It's also worth noting that, according to a CareerBuilder survey cited by Experian, one of the three major credit bureaus, 29% of employers run a credit check on new job applicants. Your bankruptcy filing could cost you potential employment.

[Read: These States Could Revoke Your Professional License Over Student Loan Debt.]

Chapter 7 is the liquidation type of bankruptcy and is more common. It can stay on your credit report for up to 10 years, so think carefully before filing. Another setback from this type of bankruptcy is that you will likely need to sell off a large portion of your property to satisfy part of what you owe to your debtors. In this case, property doesn't just mean land; it means your house, car and even some of your retirement fund could be up for grabs to pay back what you owe, depending on what exemptions are permitted.

Chapter 13 is the reorganization type of bankruptcy. It will remain on your credit report for up to seven years, but it's seen as a bit less serious because you're agreeing to pay back at least a portion of your debt while you're on a court-structured payment plan. One of the benefits of this payment plan is that you might not need to sell off any of your property to pay your debts.

How Do I Start the Bankruptcy Filing Process and Get My Student Loans Discharged?

If, after reading this and doing your research, you've decided that filing for bankruptcy is your only viable option, here's what you can do to start the process.

As mentioned earlier, you could contact a bankruptcy attorney. Attorneys are helpful to have on your side and many will offer you a free consultation to discuss your situation. There are even some attorneys who will take on your student loan bankruptcy case pro bono.

Start the process by filing for Chapter 7 or Chapter 13 bankruptcy after you've determined what best suits your situation. Next, you or your attorney will file a written complaint, which will begin the additional lawsuit needed to erase your student loans. This is called an adversary proceeding.

Then, it's off to the judge to weigh your situation. If the bankruptcy court grants your request, your student loans could be fully discharged, partially discharged or they could be recalculated with a lower interest rate.

It's a lot of hard work and it has serious repercussions, but discharging your student loans through bankruptcy is possible. As always, do your research and make sure you've considered all of the pros and cons before deciding whether declaring bankruptcy is right for you as a student loan borrower.

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