Can Private Student Loans Be Discharged in Bankruptcy? Here’s What You Need to Know

As the cost of higher education continues to rise, more and more students are turning to private student loans to finance their education. However, for some, these loans can quickly become overwhelming. This may lead to financial difficulties and the possibility of bankruptcy.

Federal student loans can often be discharged in bankruptcy under certain circumstances. However, this is not necessarily true for private student loans. You may be wondering about their options if you are in financial distress.

In this article, we will explore whether private student loans can be discharged in bankruptcy. Also, we will examine the current state of the law on this issue and the eligibility criteria for discharging private student loans in bankruptcy. Moreover, we will also discuss the potential consequences of this issue and the alternatives to discharging private student loans in bankruptcy.

Bankruptcy Laws and Dischargeability of Debts

Bankruptcy is a legal process that allows you to get relief from overwhelming debt. The goal of bankruptcy is to provide you with a fresh start. You can do this by eliminating or restructuring your debt. This way, you can regain financial stability.

There are two main types of bankruptcy for individuals: Chapter 7 and Chapter 13. In a Chapter 7 bankruptcy, a debtor’s assets are liquidated to pay off their debts. Any remaining debt is then discharged, the debtor is no longer responsible for paying it.

In a Chapter 13 bankruptcy, the debtor enters into a repayment plan that typically lasts three to five years, after which any remaining debt may be discharged.

However, not all debts can be discharged in bankruptcy. Certain debts, such as child support, alimony, and most taxes, are not dischargeable. In addition, student loans are generally not dischargeable. However, there are limited circumstances under which they may be discharged.

The discharge ability of debts in bankruptcy is determined by federal law. In order to be discharged, a debt must meet certain criteria. This includes being unsecured and not arising from fraud or willful misconduct.

It is important for you to understand which debts may be discharged and which may not. In some cases, it may be possible to negotiate with creditors to settle debts outside of bankruptcy or seek other debt relief forms.

Eligibility Criteria for Discharging Private Student Loans in Bankruptcy

Discharging private student loans in bankruptcy is generally difficult but not impossible. To do so, you must meet certain eligibility criteria. 

The most important criterion is the “undue hardship” standard. It requires you to demonstrate that repaying your student loans would cause an undue hardship for you and your dependents.

The undue hardship standard is based on a three-part test known as the Brunner test. To meet the Brunner test, you must demonstrate all of the following:

• You cannot maintain a minimal standard of living based on your current income and expenses if you will repay your student loans.
• Your financial situation is unlikely to improve over the life of the loan.
• You have made a good-faith effort to repay your student loans.

Meeting these criteria is difficult, and you must present strong evidence to support your case. Evidence may include documentation of income, expenses, and other financial obligations and evidence of efforts to repay the loans.

In addition to the undue hardship standard, other factors may impact your eligibility for discharging private student loans in bankruptcy. For example, if you can prove that loan was used to pay for expenses unrelated to education, such as living expenses, it will give you a better chance of discharging the debt.

Potential Consequences of Discharging Private Student Loans in Bankruptcy

Discharging private student loans in bankruptcy may provide you some relief if you are struggling with overwhelming debt. However, it is important to understand the potential consequences of this decision.

One major consequence is the damage to your credit score. Bankruptcy can have a significant negative impact on it. You can have difficulty to obtain credit in the future. A bankruptcy filing will remain on your credit report for up to ten years. It may be viewed negatively by lenders and other financial institutions.
Even if you obtain credit, you may face higher interest rates and stricter borrowing terms. This can make it more difficult for you to achieve financial stability in the long term.

Furthermore, discharging private student loans in bankruptcy may not completely solve your financial problems. If you have other types of debt, these debts may not be discharged in bankruptcy. Additionally, bankruptcy does not address the underlying issues that led to the debt, such as the lack of financial literacy or poor money management skills.

Alternatives to Discharging Private Student Loans in Bankruptcy

Fortunately, there are several alternatives you can consider before deciding to file for bankruptcy. 

One alternative is loan consolidation or refinancing. It can make private student loans more manageable by combining them into a single loan with more favorable repayment terms. This can reduce monthly payments. Also, it makes it easier for you to stay on top of your payments.

Another option is a loan modification. This involves changing the loan terms to make it more affordable. This can include options such as forbearance, deferment, or an extended repayment plan. You can work with your  lenders to find a solution that meets your needs and helps you keep up with your payments.

Negotiating with the lender is also a potential alternative to discharging private student loans in bankruptcy. You can discuss your financial situation and request more manageable payment plans. This may include a temporary payment reduction or a longer repayment period.

Seeking assistance from a credit counseling agency is also an alternative option. Credit counseling agencies can advice you on budgeting and money management. Also, they may be able to negotiate with lenders on your behalf.

Finally, exploring forgiveness programs is also a viable alternative. Some private student loans may be eligible for forgiveness under certain circumstances. Ensure you check these out.

Conclusion

Private student loans can be discharged in bankruptcy, but it is challenging and requires meeting specific criteria. Unlike federal student loans, the government does not guarantee private student loans, and they are subject to discharge under bankruptcy laws. 

However, to discharge private student loans in bankruptcy, you must demonstrate undue hardship, which can be challenging to prove. Furthermore, bankruptcy should be a last resort. It can have severe long-term consequences on your credit score and financial standing. It is crucial to seek professional guidance from a bankruptcy attorney before pursuing this option.

FAQs

Q: Are private student loans eligible for discharge in bankruptcy?

A: Yes, private student loans are eligible for discharge in bankruptcy under certain circumstances.

Q: What are the criteria for discharging private student loans in bankruptcy?

A: You must prove undue hardship, which is a challenging standard to meet. It requires you to show that repayment of the loans would cause significant financial hardship.

Q: How is undue hardship determined?

A: The court will consider various factors, including your current and future income, expenses, living standards, and whether you made a good-faith effort to repay the loans.