Bankruptcy is a legal process in which people can either reorganize or discharge their outstanding debts. During a reorganizational bankruptcy, people are given a period of time in which to catch up with their income and make plans for how to pay back their debtors. A complete bankruptcy erases many debts such as credit card debts. There are many legal and financial consequences for bankruptcy. It can be very hard, or impossible, to get a loan after filing bankruptcy.
Student loans usually cannot be discharged during bankruptcy. Laws have passed within the last several decades to make it impossible for most people to discharge their student loan debt through bankruptcy.
Can Student Loans Survive Bankruptcy?
Student loans are classified as non-dischargeable debt under the bankruptcy code. This means that student loans will survive bankruptcy even though all other debts are wiped clear. There are a few exceptions (see below), but bankruptcy is not a favorable solution to student loan debt.
Are There Other Ways to Discharge Student Loans?
There are some ways to discharge student loans. One is to prove that it would place an unreasonable burden, or undue hardship, to pay back the loans. This is a legal claim that is very rarely approved. There is currently a split among courts as to the best way to determine undue hardship:
- The Brunner Test – The debtor cannot maintain a minimal standard of living for him or herself and dependents; the debtor cannot repay loans with current finances and for the foreseeable future, and the debtor made a good faith effort to repay his loans.
- The Totality of the Circumstances Test – Some bankruptcy courts use the totality of the circumstances test. This test looks at all the important factors in a debtor’s bankruptcy case to determine if there’s undue hardship or not.
There are some student loan forgiveness programs through state and federal governments that allow people to discharge their loans. Working for a nonprofit, serving in the military, or enrolling in other forgiveness programs can help some people reduce or eliminate their student loan debt.
If a loan is not discharged, and the borrower is unable to pay, the loan will enter default.
Do I Need a Lawyer?
Bankruptcy law is very complicated, especially with regards to student loans, and bankruptcy lawyers are uniquely qualified to help you make your best case. A lawyer can represent you during settlement negotiations and in court.