A debt that can be eliminated in bankruptcy is called “dischargeable.” The 2005 changes to the Bankruptcy Code make it virtually impossible to discharge “qualified educational loans” unless the debtor can show undue hardship. Most people take on student loans with the highest of hopes born out of enthusiasm for that wonderful job that the newly earned degree will bring. In the last few years those hopes have been dashed as new graduates find the door slammed on their job prospects. However, even if you don’t find the job you anticipated (or no job at all), repayment obligations usually begin six to nine months after you leave school. If you can’t find work, the payments might be more than you can handle. Filing for bankruptcy may not make the debt go away.
Student loans are usually non-dischargeable in bankruptcy. This means that after your bankruptcy erases all your other debts, you still have to pay student loan debt. If you fall nine months behind, your lender can call the whole loan due at once. Filing bankruptcy can be an option in only one circumstance. The law lets you eliminate your student loans if paying them creates an “undue hardship” for you and your family. In proving undue hardship the court looks at three main factors:
- Poverty. You must prove to the bankruptcy court that you’re only earning enough to pay for a “minimal standard of living.” This usually means you are eating Ramen noodles, can’t afford cable, Internet or a cell phone – even without paying your student loans.
- Persistence of inability to pay. Not being able to pay right now doesn’t mean you will never be able to pay. You must prove to the court that your current financial condition is unlikely to change for a significant part of the repayment period.
- Good faith effort. You must show the court that you made a good faith effort to repay the debt. It helps if you were able to make at least a few payments. This shows the court that you tried. If you have made no payment on the debt due to inability to pay you must show the court that you at least requested a deferment or forbearance.
Filing a Student Loan Discharge Petition
Filing for bankruptcy won’t automatically earn you a hardship discharge. You (or your bankruptcy attorney) must file an extra petition, called an adversary proceeding or a complaint, to determine whether your student loans can be discharged. The petition asks the court to make an exception in your case from the usual rule that student loans can’t be erased. If you are one of the lucky ones and the court agrees that, considering the totality of the circumstances, your situation meets the undue hardship level, then and only then can your student loans be discharged.
Student Loans in Chapter 13 Bankruptcy
When you file for Chapter 13 bankruptcy rather than Chapter 7, you agree to pay off a portion of your debts over three to five years. The court supervises your payments, and your lenders CANNOT demand the whole loan due at once. Each month, you give your bankruptcy trustee all your extra income, and the trustee divides that money among all your creditors. This can make your overall monthly payments go down.
Even though you’ll still have your student loan payments after your Chapter 13 plan ends, your bankruptcy will erase your other debts. You’ll only have to deal with your student loan payments, if they haven’t been paid off by that time.
It is paramount that you get the assistance of a competent bankruptcy attorney because embarking on federal litigation in the bankruptcy court can be challenging and intimidating for the uninitiated.
Getting Student Loans after Bankruptcy
Although declaring bankruptcy can be a hard decision to make you’ll find that it’s not as bad as you think. There are laws that protect you from most post-bankruptcy discrimination by the government. This applies to student loans. Lenders cannot exclude you from government-guaranteed student loan programs.