Student Loans & Personal Bankruptcy

Bankruptcy: Can it knock out your student debt?

If you have a debt problem, bankruptcy can seem like a good possibility. Bankruptcy is a legal way for people who can’t pay their debts to get a “fresh start” by temporarily or permanently stopping your creditors. Bankruptcy works, it is legal and you can do it by following a simple process – either with the help of a lawyer or a paralegal service.

But if you have a student loan, bankruptcy may not be the solution you are looking for. It is possible that bankruptcy could get your student loan forgiven but it is not likely. Most of the time student loans are not forgiven when the borrower files for personal bankruptcy. In fact, for many borrowers, filing bankruptcy made things worse because during the proceedings, loan payments were not made. As a result the amount owed by student debtors who declared bankruptcy was even higher by the time they had to repay.

But it is possible, in certain cases for bankruptcy to get student debt forgiven?

If you file Chapter 7 or Chapter 13 bankruptcy, you may have your loan discharged in bankruptcy only if the bankruptcy court finds that repayment would impose undue hardship on you and your dependents. This must be decided in an adversary proceeding in bankruptcy court. Your creditors may be present to challenge the request. The court uses this three-part test to determine hardship:

• If you were forced to repay the loan, you would not be able to maintain a minimal standard of living.
• There is evidence that this hardship will continue for a significant portion of the loan repayment period.
• You made good-faith efforts to repay the loan before filing bankruptcy (usually this means you have been in repayment for a minimum of five years).

Here’s the bottom line:

If you are unable to prove any of the above, your loan will not be discharged.
On the other hand, if the bankruptcy court discharges your loan, you will not have to repay any portion of your loan, and all collection activity will stop.
In the best of conditions, bankruptcy is the debt solution of last resort. This is even more so for holders of student loans.

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