Private student loans are generally treated the same as federal student loans in bankruptcy. That means, you can’t usually get rid of them by filing a bankruptcy. Bankruptcy law gives student loans special protection in a bankruptcy, and you can only discharge them, get rid of them, by filing a lawsuit. However, private student loans have a couple of other requirements to meet in order to be found non-dischargeable. Luckily, there are also a few additional options to deal with private student loans without filing a bankruptcy. In any situation involving student loans, it is a good idea to talk to an experienced attorney to decide the best way to get the best result possible for you based on your total financial circumstances.
Does Repaying the Student Loan Present an Undue Hardship?
The undue hardship test, or the Brunner test, is used by most courts to determine if you can discharge a student loan in bankruptcy, whether it is a private loan or a federal loan.
Under the undue hardship test, you have to prove that:
1. If you are forced to repay the loan, you won’t be able to maintain a minimum standard of living for yourself and your dependents;
2. Your current financial situation will continue for a significant portion of the repayment period; and
3. You made a good faith effort to repay the loans before you filed bankruptcy.
The undue hardship test is very difficult to meet. The specific facts and circumstances of your case will be very important. Some facts that have allowed student loans to be discharged are long periods of unemployment that is expected to continue, long periods of low income, large medical debts and mental illness.
Your attorney will have to file a lawsuit in your bankruptcy case against your student loan lender and ask the judge to find the undue hardship, and rule that your student loans can be discharged. You should talk with your attorney about the case law in your jurisdiction, when the courts have found student loans to be dischargeable, and whether your case is similar.
Additional Defenses for Private Student Loans
Private student loans have other requirements that they must meet in order to be non-dischargeable in bankruptcy. First, the loan must be a “qualified education loan, as defined by section 221(d)(1) of the Internal Revenue Code of 1986.” In order to be a qualified education loan, it must come from an “eligible education institution”. The Department of Education puts out a list each year of the schools that qualify as eligible education institutions. If your school was not on the list for the year that you took out the loan, the debt will not be considered a “student loan” and can be discharged.
Your attorney should also look at what you used the student loan money for. If the loans were used for something other than a “qualified higher education expense”, such as tuition, books, fees, or supplies, a portion of your private loan may be discharged.
These types of defenses must also be presented in a lawsuit that is filed within your bankruptcy case. Again, talk to a qualified attorney before taking on the expense of trying to discharge a private student loan.
Other Options to Deal With Private Student Loans
There are options to deal with your private student loans that don’t involve filing a bankruptcy. Remember, that a private student loan is just like any other unsecured loan that you may have. You can try refinancing your private student loans. By refinancing, you may be able to get a better interest rate and longer repayment term, which can reduce your monthly payment. The lower interest rate can save you thousands of dollars of interest. However, in order to refinance, a lender is going to look at your credit score, is going to want you to have steady employment, and a good debt to income ratio. If you are going to try to refinance, you should do that before you get behind on your payments.
You can also try to negotiate a settlement with your private student loan lender. You can do this yourself, or you can try working through a debt settlement company that will do it for a fee. Usually, you are trying to offer a lump sum of money now, rather than the lender having to wait while you make a stream of payments. You should talk to your lender, see if they have any options available to help you out during a rough time. If you have no luck working directly with your lender, then talking to a debt settlement company may be a good option. Just remember, that settling a private student loan for less than what you owe can mean that you will end up owing income tax, so talk to a tax professional before signing anything. It can also have a negative effect on your credit rating, so make sure you take these issues into account before deciding to settle.
Finally, you can try to get extra income to pay as much as you can on your private student loan as possible to get it paid off as fast as possible. If you also have federal student loans, you may be able to free up some cash by utilizing the income based repayment plans available for federal student loans to lower those payments so that you can pay extra on the private loans. You can also try picking up extra work on the side to make extra money to pay your private loans down quicker.
Questions for Your Attorney
• Can I discharge my private student loans in a bankruptcy?
• Do my private student loans fall into any of the special categories that make them dischargeable?
• Do I have other options to deal with my student loan debt?