Whether you can write off your student loan could very much depend on WHEN you ask the court for a determination of “undue hardship.”
The 3-Part “Undue Hardship” Discharge Test
In the last blog post we introduced the 3-part test that the federal courts have developed to figure out who can discharge (legally write off) a student loan for “undue hardship.” We also noticed how all of the 3 parts of that test are time-based, as follows:
1. The first part of the test focuses on the present—whether with your income and expenses as of the time you are asking for the “undue hardship” discharge you would be unable to maintain even a minimal standard of living if you had to repay the student loan.
2. The second part focuses on the future—whether the present “undue hardship” is expected to last throughout the loan repayment period.
3. The third part focuses on the past—whether you had made a meaningful effort to repay the loan or to qualify for appropriate administrative programs to delay repayment or reduce the monthly payments before asking for the “undue hardship” discharge.
So When Should You Ask for a Hardship Discharge?
Because of these timing considerations often it’s crucial to file a Chapter 7 at the right time to get the best chance at discharging—permanently writing off—your student loan(s):
1. You or your dependent(s) must be experiencing an “undue hardship” at the time your attorney asks the bankruptcy court for the discharge, so you may have to wait until you are at that stage. For example, if you have a chronically worsening medical condition which currently allows to work and pay the student loan (after discharging all your other debts through the Chapter 7 case), but you will likely not be able to work in the future, you will likely have to wait to ask for the discharge until that point when you can no longer work.
2. Since the “undue hardship” occurring at the time your attorney requests the student loan discharge must be expected to last throughout the loan repayment period, you may have to wait until that long-term expectation applies. For example, if you were in a very serious vehicle accident just a few weeks ago leaving you currently medically disabled and unable to work, you may have wait until your doctors are able to tell you how long your rehabilitation period will be, and whether and when you will be able to return to work. If your remaining student loan repayment period is long—say, 15 or 20 years—you will need to see if your disability is expected to span that length of time.
3. Since you must have taken certain action before requesting a student loan discharge—making a meaningful effort to repay the loan and/or to applying for appropriate administrative programs to deal with it—you need to make those efforts beforehand. For example, if you recently entered the repayment period, you will likely have to apply to defer and/or reduce payments before being able to ask the court to altogether discharge the whole debt on the basis of “undue hardship.”
But what if you can’t wait for the right timing to meet these conditions? What if you need immediate relief from your other creditors and can’t wait until all of the three above conditions are met? You have two possible solutions:
1. File your Chapter 7 case to deal with the rest of your creditors, and then wait to ask for the “undue hardship” discharge of your student loan(s) until the timing is right—until you can meet the above 3-part test. Since most Chapter 7 cases last only 3 or 4 months, that may mean letting your case finish and be closed, and then later filing a motion to reopen your case later—perhaps even years later—in order to ask to discharge the student loan(s) when the time is ripe to do so. Be sure to discuss this thoroughly with your bankruptcy attorney because the procedures on this can differ in various parts of the country.
2. File a Chapter 13 “adjustment of debts” instead of a Chapter 7 “straight bankruptcy,” which can give you a number of advantages. Since Chapter 13 cases tend to last 3 to 5 years, you have a longer period of time during which to ask for discharge of the student loan(s) while the case is still active. In the next blog we will explain this and some of the other timing aspects of dealing with student loans under Chapter 13.