Bankruptcy and student loans

But when it comes to student loans, bankruptcy is usually not a solution. Except in unusual circumstances, student loans are not dischargeable through bankruptcy. If you are considering filing for bankruptcy because student loans make up most of your debt, you may want to reconsider.

In all likelihood, you will still have to pay back your student loans—even after bankruptcy.

Here are some key things to consider before you file:

• The consequences of bankruptcy
• Types of personal bankruptcy
• Why claiming “undue hardship” rarely discharges 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 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 most 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.

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Why claiming “undue hardship” rarely discharges 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 the “rare debtor.” 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.

Usually 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 beyond your ability to change
• You have made good faith efforts to repay your student loans

For most student loan borrowers, the legal hurdles are significant.

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Why you should stay current with your student loans and avoid default

It’s very important that you do everything you can to stay current on your student loans. Defaulting on your student loans will make your financial situation worse.

The consequences of default are severe:

• You lose benefits like deferment, forbearance and flexible payment options
• 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
• You can hurt your career

If you are not in default but cannot make your payments, you 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 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.

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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:

• Equifax
• Experian
• TransUnion
• Innovis, Inc.

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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 reconsider. There are other alternatives.

If you are not in default, and you have not filed for bankruptcy, consider these options:

• Find 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
• See if you qualify for loan cancellation

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:

• Loan rehabilitation
• Default repayment plan
• Loan consolidation

For more information about managing a defaulted loan, visit our Manage default section.

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.

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Getting additional help

If you filed for bankruptcy, your lender may no longer “hold” your student loans. ECMC is the nation’s primary servicer of FFEL Program loans in bankruptcy, which means we probably hold your loans.

Please contact ECMC at 1-888-363-4562 if you have any questions about student loan bankruptcy. If ECMC holds your loan, you can get detailed information about your account online by logging in to our secure site.

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: We cannot provide your private information to anyone else, such as your spouse, attorney or credit counselor, unless you approve. To give your consent, complete and sign an Authorization to Disclose Info in Bankruptcy. Send the form directly to us. Mail the form to:

ECMC
P.O. Box 16408
St. Paul, MN 55116-0408

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