People who take out large student loans and then find themselves unable to earn enough income to make their loan payments often wonder whether the loans can be discharged in bankruptcy. The short answer is “almost never.” Still, bankruptcy might provide you with options for managing your student loan debt.
Student Loans in Chapter 7
In most cases, a student loan cannot be discharged in bankruptcy. If, however, student loans are only part of your debt load, discharging your other debts in a chapter 7 bankruptcy might free up income that you can use to make your student loan payments. For instance, if you find yourself with a monthly cash shortage because you are struggling to make credit card payments and student loan payments, discharging the credit card debt in a chapter 7 bankruptcy might make give you the extra money you need each month to make your student loan payments.
Student Loans in Chapter 13
While you cannot discharge a student loan in a chapter 13 bankruptcy, you can include student loans in your chapter 13 payment plan. Doing so prevents student loan debt collectors from continuing to harass you, and it gives you a chance to get caught up on delinquent payments. You are not required to pay your student loans in full during the course of your chapter 13 plan, so you might be able to make smaller monthly payments on your student loans while your chapter 13 plan remains in effect.
At the end of the chapter 13 plan, your student loans will not be discharged. You will still be required to pay the balance of your student loans after your chapter 13 ends. At that point, however, you might be earning a higher income and could be in a better position to make your loan payments or to negotiate a new payment schedule. If you completed your chapter 13 plan successfully and still owe student loans, you might even be able to file another chapter 13 plan to further delay payment of your student loans. That possibility often persuades student loan creditors to work with you to establish affordable payment terms or to forgive some of your accrued interest charges.
Hardship Discharge
The Bankruptcy Court has the authority to grant a “hardship discharge” of student loans, but that authority is rarely exercised. You must persuade a Bankruptcy Judge that paying your student loans would constitute an undue hardship. The test you must satisfy to prove “undue hardship” varies from judge to judge, but it is always a difficult test to meet. You will generally be required to prove that you have made a good faith effort over a long period of time to pay your student loans, and that you (and, if applicable, your family) are forced to live in a state of poverty because of your student loan payments. If you sustained a severe disability after you took out your student loans that greatly reduces your ability to earn income, that might be the kind of circumstance that would persuade a judge that payment of your student loans would be an undue hardship. You should consult with a bankruptcy attorney to learn more about how strict or lenient the Bankruptcy Judges in your jurisdiction are when they are asked to grant a hardship discharge of student loans.
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