What Happens to Student Loans in Bankruptcy Cases?
Student debt is at an all-time high, and many students who have not been out of college for long are feeling the effects. This has been accentuated by an economy that has not been thriving, meaning that many students have to take jobs that do not pay enough to cover their debt or the debts come due before they have taken any jobs at all. Sometimes, these students may turn to bankruptcy to get rid of other debt, such as a business loan, a car loan or a credit card bill.
If you do this, it is quite important to understand that student debt is not considered during bankruptcy proceedings. It is not known as a dischargeable debt, like credit card debt. This means that you can go through the entire process, whether using Chapter 7, Chapter 13, or another type of bankruptcy, and your student loans will remain, even after the other debt is eliminated. You still must repay those loans.
As with almost anything, there are exceptions to the rule. It is technically possible to have your student loans discharged, though it is rare.
To do this, you have to go to the bankruptcy court and put in a filing for an "adversary proceeding." The goal of this filing is to show that you have been put into a position where you consider your loans to be impossible to repay, defining them as an undue hardship. In essence, it is just to show that extreme circumstances out of your control have made it so that you cannot repay the student loans that you took out, and you are asking the court to lump them in with the rest of your debt when you declare bankruptcy.
Now, some who file an adversary proceeding are still going to be denied, but there are certain things that, if proven, may cause the loans to be forgiven. The three main things that the court needs to see are:
- That you did try to pay your loans back, putting in what effort you could.
- That you expect to suffer from financial issues for the foreseeable future, so they are not going to go away during the time that has been allotted for repayment of the loan.
- That your family is being negatively impacted by the loans because paying them back means you do not have enough money for an acceptable standard of living.
When doing this, it is important to remember that the court is going to look at the minimum standard of living that is required for your family to be safe and healthy. For example, having adequate clothing and food on the table is a minimum requirement, but having designer clothes and going on vacation every year is not. If the court determines that you may be financially restricted from things that you simply want, then you may be denied. However, the goal is not to put you and your family into poverty over the student debt.
Other elements that may be considered are things like medical hardships, employment status, and the like.
One interesting thing about this process is that the adversary proceeding and the bankruptcy filing are not the same lawsuit; they are two different legal steps that you can take, which will then tie together if the first one is approved. This can get very complicated, so it is important to make sure that you understand exactly what will be asked of you; overlooking even the smallest part of the process could lead to your being denied.
As you can see, most bankruptcy cases do not touch student loan debt in any significant way. However, this does not mean that having the loans erased is impossible. It can be a lengthy process, but it is something that has happened in many cases. To move forward, be sure that you know exactly what you must ask the court, the order in which it must be done, and how to best show that your loans should be forgiven.
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