According to American Student Assistance, there is more than $1 trillion in outstanding student loan debt in the United States. Because of this crisis, student loans have surpassed credit cards as being one of the top reasons that consumers have difficulty paying their bills and managing their finances. Debt problems associated with student loans are an increasing problem for more and more Americans.
If you are struggling with student loans, you may think that filing a bankruptcy case will help you to get rid of your student loans. However, there are several things that you should know about bankruptcy and student loans before you make the decision to file.
1. Most student loans are non-dischargeable in bankruptcy. While it is not impossible to discharge a student loan through your bankruptcy case, the bankruptcy laws were changed so that student loans were not automatically discharged in a personal bankruptcy case. Unlike other unsecured debts (i.e. medical bills, credit cards, etc.) that are subject to the bankruptcy discharge, student loans are not automatically discharged when you file.
2. You must meet certain criteria to have student loans discharged in bankruptcy. In order to have your student loans discharged through bankruptcy, you must meet certain criteria. The final deciding factor as to whether or not your student loans will be eligible for a discharge will rest with the bankruptcy judge that hears your motion.
3. You must file a motion in the bankruptcy court to discharge your student loans. Most unsecured debt is automatically discharged, provided that you include the debt in your bankruptcy filing and that the creditor does not object to the debt. However, if you want to discharge your student loans through bankruptcy, you must file a motion with the court. The bankruptcy judge will hear the evidence presented at the hearing to determine if you are eligible for a discharge of your student loans.
4. Student loan interest does not stop when you file bankruptcy. Even though you may not be required to repay your student loans during your bankruptcy case, the loans will continue to accrue interest. If you can pay something toward your student loans during the bankruptcy case, it will help decrease the amount that you owe when your bankruptcy case is closed.
5. Chapter 13 bankruptcy does not usually cover student loans. Filing for Chapter 13 bankruptcy is an option that many debtors choose. In most Chapter 13 cases, the unsecured creditors will receive a percentage of the debt that they are owed (i.e. pennies on the dollar). This includes your student loan debts. Therefore, you will still owe the balance of your student loan when your Chapter 13 bankruptcy case is closed. Debtors that choose to voluntarily pay their student loans during their Chapter 13 case find it much easier to pay off their student loans rather than allowing the loans to accrue interest during the five-year bankruptcy plan.
Discharging Student Loans through Bankruptcy
As discussed above, there may be cases in which you can discharge your student loans through bankruptcy. However, your attorney must file a motion with the court, alleging that you meet certain criteria to be eligible to discharge your student loans. You must prove to the court that paying your student loans will place an undue hardship on you and your family. Most bankruptcy courts use a three-prong test to determine if an undue hardship will exist if you are required to repay your student loans.
First: The debtor must prove to the court, based on their current income and expenses, that the debtor will be unable to maintain a minimal standard of living for the debtor and the debtor’s dependents if they are required to pay the student loan or loans.
Second: The debtor must provide the court with evidence that demonstrates that the debtor’s current financial state will continue for the foreseeable future and that the time period represents a significant portion of the loan repayment period.
Third: The debtor must provide evidence that they have made good faith efforts to repay the student loans. While there is no set standard for what is considered a good faith effort, some judges have ruled that a minimum of five years of payments is required to establish a good faith effort.
Even if a debtor is unable to discharge their student loans through bankruptcy, filing a bankruptcy case still may be in the debtor’s best interests. Discharging other debts may allow the debtor to have sufficient income to pay back their student loans. Before making any decisions as to whether or not to file a bankruptcy case, you should consult with an experienced bankruptcy attorney to discuss your legal options as well as the advantages and disadvantages of filing a bankruptcy case.