Can you file bankruptcy on private student loans
A common question of student loan borrowers is can you file bankruptcy on private student loans. It seems most people intuitively grasp that you cannot discharge federally guaranteed student loans (or federal student loans) in bankruptcy. However, many borrowers struggling with private student loans are hopeful that private student loans can be discharged bankruptcy.
Private Student Loans are NOT discharged in bankruptcy.
The short answer is, sadly, a borrower may not file bankruptcy on private student loans. The long answer is this. When Congresses rewrote the bankruptcy code in 2005, it made it so both federal and private student loans could not be discharged in bankruptcy. Prior to 2005, a debtor could discharge private student loans after so many years. After 2005, the bankruptcy code no longer distinguishes between federal and private student loans when it comes to bankruptcy.
What about Student Loan Discharge based on Undue Hardship.
There is more to the private student loan story. The filing of bankruptcy, by itself, will not (never) discharge a student loan debt. If you want to discharge your private student loans in bankruptcy, you must file an adversary proceeding. An adversary proceeding is a lawsuit. In that adversary proceeding, you must prove that repaying your student loans will create an undue hardship.
You might be asking: If I am filing bankruptcy, then obviously the student loans are creating a hardship. I wish it were that simple. The short version of undue hardship is that the debtor cannot maintain a minimal standard of living if repaying student loans and additional circumstances exist that make this state of affairs likely to persist for the foreseeable future. I call this Financial Hardship Plus. The ‘plus’ means that there must be more going in your life than the inability to pay. The plus is typically a health or mental issue, but sometimes extreme poverty or advancing age will work.
It is easier to discharge private student loans in bankruptcy.
If you find yourself in bankruptcy and contemplating an adversary proceeding, it is easier to discharge private student loans than federal student loans. Reason being, federal student loans have numerous repayment programs. Collectively, these programs are referred to as income-driven repayment. On some of those programs, if the debtor’s income is low enough, the debtor could have $0.00 per month payment. As you might expect, it strains credulity to argue that a $0.00 monthly payment creates an undue hardship (however, we do have an argument—the futility argument—to try to deal with that). Private student loans don’t have such options.
Although the mere filing of a bankruptcy will not discharge private student loans, the borrower has an easier time proving undue hardship in an adversary proceeding to discharge those private student loans.
As an aside, this firm’s preferred option for resolving private student loans is a settlement. Settling private student loans is the path of least resistance, but that is a different article.