Bankruptcy and student loans
Accordingly, you may still have to pay back your student loans—even after bankruptcy.
Here are some of the things to discuss with your bankruptcy attorney before you file:
- The consequences of bankruptcy
- Types of personal bankruptcy
- Why claiming “undue hardship” may not discharge student loan debt
- Why you should stay current with your student loans and avoid default
- Understanding the impact on your credit score
- Making the best decision about bankruptcy
- Getting additional help
The consequences of bankruptcy
Bankruptcy can successfully reduce or eliminate many forms of debt, but there are negative consequences. Depending on which type of bankruptcy you file, you may have to follow a court-ordered payment plan or undergo a liquidation of nonexempt assets.
Bankruptcy also impacts your future by remaining on your credit report for up to 10 years. Bad credit can make it difficult to:
- Get a job
- Rent an apartment or buy a home
- Get credit or borrow money
- Receive certain kinds of additional Title IV financial aid
- Get insurance
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Types of personal bankruptcy
The two most common types of personal bankruptcy are Chapter 7 and Chapter 13.
In Chapter 7 bankruptcy, your nonexempt assets are liquidated, or sold for cash, to pay your creditors. Any remaining unsecured debt, like credit card debt, is usually discharged. But in many cases, your student loans will remain a debt you must repay.
A Chapter 13 bankruptcy does not force you to liquidate your assets, but it does require you to repay all or a portion of your debts in installments specified by a court-ordered bankruptcy plan.
If you successfully complete your Chapter 13 bankruptcy plan, the court discharges most or all of your remaining unsecured debt—but not your student loans. Your student loan debt will most likely remain, and you must repay it.Back to top
Why claiming “undue hardship” may not discharge student loan debt
You may have read that student loans can be discharged when paying them would place an “undue hardship” on the borrower. But Congress intended that discharge for undue hardship be reserved for debtors facing more than the financial hardship that accompanies all bankruptcies. So while you may claim undue hardship based on any number of contributing factors, it is up to the bankruptcy court to determine if your situation meets the legal standard set by Congress.
In most jurisdictions the bankruptcy court will use what is known as the Brunner test, which requires you to show:
- You cannot pay your student loans and maintain a minimal standard of living
- Your circumstances (often disability related) are such that the hardship is long-term and not within your control
- You have made good faith efforts to repay your student loans
For many student loan borrowers, the legal hurdles are significant.Back to top
Why you should stay current with your student loans and avoid default
It’s very important that you stay current on your student loans. Defaulting on your student loans has severe consequences.
- You lose benefits like deferment and forbearance
- You can lose 15% of every paycheck through wage garnishment
- You can lose your tax refunds
- Your loan balance increases by up to 25% in collection costs
- You can severely damage your credit score for the next 7 years
- You are subject to collections
- You can be sued for the entire loan amount
If you are not in default but cannot make your payments, you may still have options. Visit our Get help paying section to learn about deferments, forbearance and other solutions.
Above all, contact your lender. They will explain your options and attempt to help you find a way to avoid default.
If you don’t know who your lender is, go to the National Student Loan Data System (NSLDS), which is the central database for all federal student loan information. If ECMC holds your loans, call us at 1-888-363-4562.Back to top
Understanding the impact on your credit score
Filing for bankruptcy severely impacts your credit score, and it remains on your credit report for up to 10 years. Bad credit makes it difficult to obtain Title IV financial aid, namely PLUS loans. Check your credit reports to ensure they are accurate. If you disagree with any information, you can dispute any credit entry.
File credit disputes online with the national credit bureaus:
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Making the best decision about bankruptcy
Before making any final decisions about bankruptcy, consider consulting an attorney or financial advisor to get an objective assessment of whether bankruptcy is the best solution for you.
Remember, if you are considering filing for bankruptcy because most of your debt is your student loan debt, you may want to consider other alternatives.
If you are not in default, and you have not filed for bankruptcy, consider these options:
- Seek a repayment plan with lower payments
- See if you are eligible for a deferment
- Temporarily postpone your payments through forbearance
- See if you qualify for loan forgiveness
- Consolidate your loans
For more information about getting assistance, including tools that can help you get a handle on your finances, visit our Get help paying section.
If you are in default, and you have not filed for bankruptcy, you may want to look into:
No matter what you decide to do, keep your loan holder informed. They can help you find solutions even when you’re facing bankruptcy.
If you don’t know who your loan holder is, go to the National Student Loan Data System (NSLDS), which is the central database for all federal student loan information. If ECMC holds your loans, call us at 1-888-363-4562.Back to top
Getting additional help
If you filed for bankruptcy, your lender may no longer "hold" your student loans.
If ECMC holds your loans and you have questions about student loans in bankruptcy, please contact us at 1-888-363-4562.
If you don’t know who your loan holder is, go to the National Student Loan Data System (NSLDS), which is the central database for all federal student loan information.
Please note: If you wish ECMC to disclose your private information to anyone else, we will need you to complete and sign an Authorization giving your consent. Send the form directly to us. Mail the form to:
P.O. Box 16408
St. Paul, MN 55116-0408
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