Bankruptcy and Student Loans

Bankruptcy offers financially strapped Americans the opportunity to dig out from under their debt and start anew. It's an opportunity more than a million Americans grab each year. Some of the biggest debtors in the United States are college students who often graduate with a brand new degree and thousands of dollars in student loan and credit card debt. Unfortunately, while bankruptcy can often relieve college grads of their credit card debt, the student loan will likely remain their responsibility.

Student loans can only be included in Chapter 7 bankruptcy (most or all debt discharged) if you sufficiently prove that repaying them will cause you and your family undue hardship. According to the findings in Brunner v. New York State Higher Education Services, which set the precedent many courts follow for determining the standards of undue hardship, "(1) the debtor cannot maintain, based on current income and expenses, a "minimal" standard of living for herself and her dependents if forced to repay the loans; (2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and (3) that the debtor has made good faith efforts to repay the loans".

Meeting the undue hardship clause is extremely difficult, so don't count on that happening unless you meet the strict criteria. If you do feel as though you meet the undue hardship criteria, you or your lawyer must file for an adversary proceeding. What this means is you'll go into court to make and support your case for undue hardship. If you win, your student loans will be discharged in bankruptcy.

If you do not win your case for undue hardship, you still might want to consider filing for Chapter 7 bankruptcy if you have substantial credit card or other dischargeable debt. By eliminating your other debt, you may be able to relieve some of your financial burden and pay your student loans more easily.

You may also consider filing for Chapter 13 bankruptcy. Whereas Chapter 7 bankruptcy discharges most or all of your debt, Chapter 13 requires you to pay back most or all of your debt. In some instances, however, the court will allow part of the student loan to be discharged under undue hardship (but only if you prove financial hardship) while the remaining amount is placed into Chapter 13.

If you opt for Chapter 13, your bankruptcy trustee will take your financial information - including your total income each month, your recurring debt and disposable income - and create a repayment plan. Due to changes in the bankruptcy law in October 2005, filing for Chapter 13 may mean you'll have a lot less to live on.

Your bankruptcy trustee will calculate your disposable income based on expense guidelines set by the IRS. Unfortunately, in some instances, the expense limit is lower than the actual cost of living which means you might have to deal with money being tight.

However, if neither Chapter 7 nor Chapter 13 bankruptcy is an option for you, don't worry. You still have options for relieving some of the stress. Many student loan companies offer debt consolidation, in an effort to lower your monthly student loan payments and relieve you of some of the financial pressure.

The Department of Education offers direct consolidation loans and is an excellent place to begin your search for great deals on consolidation loans. You can check out their website. Some other websites worth checking out are: Sallie Mae, Fin Aid, and Student Loan Xpress. To compare student loan consolidation offers, Google "student loan consolidations" or consider contacting your college alumni or financial aid office for advice.

The bottom line is that if you're strapped for cash, you have numerous options - including bankruptcy - to help relieve your burden while allowing you to repay your student loans at a comfortable rate.


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+   Information about the types of debts that can be discharged with bankruptcy
+   Chapter seven bankruptcy filing basics
+   Bankruptcy and child support debt; what you should know
+   Choosing a bankruptcy attorney that meets your needs