Can Bankruptcy Clear Student Loans – Yes. If you qualify, you may be able to get some federal student loans discharged through Chapter 7 or Chapter 13 bankruptcy. After filing for bankruptcy, you must take the additional step of starting an adversarial proceeding to discharge your debts. The Ministry of Justice’s November 2022 guidelines streamlined and simplified this process. Now, most federal student loan applicants can do this on their own without hiring a lawyer. To be eligible under the new guidelines, your loans must be federal Direct Loans or Direct Consolidation Loans held by the Department of Education. In addition, you must be able to show that you are unable to make the payments, but have made good faith efforts to do so in previous years.
There’s a long-standing myth that you can’t get rid of your student loans through bankruptcy. Part of the myth persists because most student loan borrowers who are potentially eligible for bankruptcy discharge don’t even try.
Can Bankruptcy Clear Student Loans
The bankruptcy process itself requires a lot of forms, collecting documents and patience. And to get rid of your student loan debt, you need to take an extra step: file for bankruptcy. In the past, this process was so complicated – and intimidating for many people because it involved a separate hearing – that most filers chose to hire an attorney to do so successfully.
Reopening A Case To Discharge Student Loan Debt
In November 2022, the Ministry of Justice and the Ministry of Education issued new guidelines that simplify the competition process and make it less intimidating. The guidelines also provide clarity to courts on how applicants can prove “undue hardship”. While we’re still seeing the effects of the new guidelines, there’s some early evidence that it’s making it easier to file for federal student debt bankruptcy.
If you meet eligibility requirements, bankruptcy can be a viable path to eliminating some or all of your student loan debt. First, make sure you qualify to file for personal bankruptcy. This can be either a Chapter 7 or a Chapter 13, depending on your financial situation and goals. Then make sure your loans qualify. Finally, see if you qualify for undue hardship to discharge your student loans through bankruptcy.
If you’re considering bankruptcy to get a fresh start, start by looking at your entire financial situation: what you owe, how much you owe, and what your current income and expenses are. You’ll also want to consider whether you own any assets — such as a car, home, or retirement accounts — and whether bankruptcy is the best form of debt relief for you.
You will need to know your income and expenses for a means test. This is a test that all Chapter 7 bankruptcy filers must pass to prove that they are eligible to file. If you fail the means test, you may still be able to file for bankruptcy, but you may need to review Chapter 13. You can use our free nonprofit screening to see if you qualify for our program to filing Chapter 7 bankruptcy documents.
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You’ll also want to look at what kind of credit you have. Currently, only federal direct loans and/or direct consolidated loans held by the US Department of Education are eligible for bankruptcy relief under the new guidelines. If you’re not sure what type of loan you have, you can get that information from the National Student Loan Data System (NSLDS). NSLDS maintains information about any federal student aid you have received.
Perkins loans, FFEL/FFELP loans, and private student loans are not covered by the new guidelines. In some cases, you can file for bankruptcy on these and private student loans, but the process will look different. To learn more, read our article. Can I Discharge a Private Student Loan in Bankruptcy?
These three elements make up what is often called the Brunner test. Bankruptcy law does not clearly define how petitioners can demonstrate their inability to pay or that they have made good efforts to do so. New DOJ guidance helps bankruptcy judges more uniformly interpret the Bankruptcy Code by further defining these elements of the Brunner test. You can read more about each of these below in our attestation form section.
If you’re struggling to pay off your student loans and you’re thinking about filing for bankruptcy to resolve your loans and other debts, you can use our free screening tool to see if you qualify for a free filing. It only takes five minutes to find out if you qualify.
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Let’s outline the steps to get your student loans in bankruptcy. For the sake of brevity, we’ll assume you’re already familiar with how to file for bankruptcy. If not, read our popular How to File Bankruptcy for Free article first.
An adversarial complaint initiates an adversarial process. This is very similar to a civil lawsuit. You begin the adversarial process by filing a complaint with the clerk of court. A complaint is a formal legal document.
Depending on which district you are in, you may be able to file this electronically. If you do not file it electronically, you will need to file it with a cover letter, which the court provides as a PDF form. If you are eligible to file a case with , our nonprofit can help you draft the complaint documents.
You must include a complete list of your student loans with your opposition complaint. To get this list, you can download a report from the National Student Loan Data System (NSLDS). Here’s an article detailing how to do it: How to Use the National Student Loan Data System (NSLDS).
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The Assistant United States Attorney (AUSA) will represent the US Department of Education in the proceeding. AUSA will review the adversary’s complaint and your attestation form.
After you file a complaint with the court, you must “serve” the complaint on the defendant you named—your federal student loan lender(s)—and send a copy to certain parties in the bankruptcy case.
Serving a complaint simply means mailing a copy or delivering it in person. The point is to notify the defendant – your creditor – of the bankruptcy proceedings. You will also need to make sure you have sent AUSA the summons and complaint.
The U.S. Attorney’s Office for your district bankruptcy case should contact you (usually by email) after receiving your complaint and summons. If you have not heard back from them within two weeks of sending the documents, it is recommended that you contact their office.
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The US Department of Justice has an online search tool that can help you find the contact information you need.
Call the office and tell them that you want to confirm that they have received the documents for your adversarial bankruptcy case. After receiving confirmation, stay in touch with the office about next steps. The Department of Education must send a report of the legal proceedings to the US Attorney’s Office. Ask them to give you a copy of this report.
Some offices move faster than others. Don’t be afraid to check in regularly to see how your case is progressing.
You will then complete an attestation form to send to the U.S. Attorney for your local bankruptcy district. This is the form that will be used to determine if you meet the requirements of undue hardship. The form begins by asking basic questions to gather your personal and student loan information. The rest of the form is dedicated to seeing if you meet the undue hardship standard by asking about your income and expenses.
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Expense information: This includes basic living expenses, uninsured medical expenses, payroll deductions, housing expenses, transportation expenses, and other necessary expenses such as child care
What you’ll need to answer these questions: To help you complete the income portion of this form, it’s helpful to gather recent paychecks, bank statements, and unemployment or social security documents (if applicable). For expenses, collect recent bills, including medical bills, insurance payments, your paycheck (to see deductions), recent transportation bills and receipts (including maintenance and gas).
If you use a credit or debit card to pay for your expenses, you can review your recent transaction history to capture some of the expenses you’ve paid for that you might not keep receipts for, such as groceries, household goods, clothing, personal care products, petrol for your car or public transport costs. Don’t forget to include information about your dependents’ expenses as well.
There’s a pretty simple formula for determining your ability (or inability) to pay off your student loan debt each month: your gross income minus your allowable expenses. You will calculate your gross income and allowable expenses on the affidavit form. If you run these numbers through a formula and it shows $0 remaining each month, that indicates an inability to pay off your student loan debt.
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If you have income remaining, AUSA will review your loan payment to determine if you qualify for a partial exemption.
The certification form will ask you a series of questions to obtain