Can I Discharge Student Loans in a Bankruptcy?

With the staggeringly high cost of education, student loan debts today are massive for many students. When graduates struggle to find suitable employment, paying back student loans becomes an almost insurmountable task.

Former students may begin to wonder whether bankruptcy is an option for them. Unfortunately, while discharging student loans in bankruptcy is possible, it almost never happens in practice. Former students must be virtually homeless and penniless to receive a discharge of student loans. Thankfully, however, there are other options that you may want to consider if you have defaulted on your student loans.

Making Payment Arrangements with Your Lender

Depending on whether you have private or federal student loans, you may be able to work out a repayment plan that works for you, even if you have already defaulted. Student loan creditors have an interest in working with you because it is often easier to arrange a payment plan than go through the trouble of attempting to collect the student loan debt in other ways.

You may want to start by talking to your lender about changing your repayment options. Explain your circumstances to see if you qualify for any deferred payment plan or forbearance as well.

Federal Loan Repayment Options

If your loan is through the federal government, you may qualify for one or more income-based repayment plans. There are several available, and they can considerably cut down your monthly obligations and even forgive a portion of your student loans over time.

For any of these options, you must have high debt compared to your income and meet other specific qualifications.

  • The Revised Pay As You Earn Repayment Plan (REPAYE Plan): The REPAYE Plan allows you to limit your monthly loan obligations to 10% of your discretionary income and any outstanding balance will be forgiven after 20 years of continued payments.
  • The Pay As You Earn Repayment Plan (PAYE): The PAYE Plan is limited to up to 15% of your discretionary income, and your loan will be forgiven after up to 25 years of continued payments.
  • The Income Contingent Repayment Plan (ICR): You will pay the lesser of either 20% of your discretionary income or the amount you would pay with a fixed payment of 12 years, whichever is lower. The outstanding amount after 25 years is forgiven.
  • The Income Sensitive Repayment Plan: Your monthly payment is based entirely on your annual income, and the calculation will vary by lender. The repayment period is up to 15 years.

Deferment and Forbearance

Under certain conditions, you may be able to stop paying your loans altogether for a short period. Working with your lender to obtain this treatment can help you avoid default; you may not qualify if you are already in default.

While the concepts are similar, the major difference between forbearance and deferment is that in a forbearance, you are still responsible for paying the interest that accrues during the period of nonpayment. In a deferment, you may not be responsible for interest.

You will have to submit an application for either of these treatments and meet certain eligibility requirements. Borrowers who are eligible may have high medical expenses, a change in employment, or financial difficulties.

While bankruptcy may not be an option for your student loan obligations, you may have other choices to consider. MaxwellDunn can help you evaluate your possibilities in the context of your overall financial health. Contact us today to schedule an appointment.