Student Loan and Bankruptcy

It is difficult; however, it is not impossible to discharge student loan in bankruptcy. There are many misconceptions that student loans are not discharged in bankruptcy. But it’s not true. You can get some or all of your student loan discharged in some cases.

Biggest Obstacles
Borrowers have to prove that paying student loans will cause financial hardship to them and their dependents. You have to go through several tests in the court to prove this. The most common one used by courts is the Brunner test in which it is checked whether the borrower can maintain a minimal standard of living for himself and his dependents or not, this financial condition will be there for a longer time during the repayment period and whether he has made efforts to repay the loan.

Chapter 13- A Viable Alternative
If you can’t prove your hardship, you can go for Chapter 13 which helps you pay a reduced or revised amount to the lender when you are in repayment period. However, you have to pay the remaining student loan once you come out of Chapter 13 bankruptcy. Chapter 13 also allows you to make up your missed payments if you have defaulted on your mortgage or car loans. It provides the formal way of repaying the loan and protects you from creditor’s harassment.

Financial Hardship
It depends on courts to decide whether you have to go through financial hardship if you pay your student loan. This varies from person to person and from one situation to another. If the court finds that you have reached your maximum earning capacity, or you did not get any benefit from your education or went to a counterfeit school, or you have some mental illness which will continue to interfere in your work, or your health problem limits your future employment opportunities, all these would be treated as undue hardship. If the court finds that you can get a better and high-paying job but still prefer low-paying job, it may not be considered as financial hardship.

Recover from Bankruptcy
Bankruptcy can impact your customer report for up to 10 years which affects your ability to get credit, buy a home or find a job. It also impacts your eligibility for student financial assistance program which includes post-secondary education loans. However, you can try to improve your credit. You can obtain a copy of your credit report and check if all the entries are correct or not.

Alternatives for Dealing with Loans
You should look for different repayment options before filing for bankruptcy. There are many ways to manage your student loan payments.
You can choose a repayment plan based on your income.
You can check whether you can go for a loan deferment.
You can get a loan forbearance to stop or reduce payment temporarily.
You can consolidate your student loans.
You can check if you are eligible for loan forgiveness or cancelling your loans.

Consult with a qualified attorney before filing student loan in bankruptcy.