For those in bankruptcy, you may be surprised to find out that if student loans are your major financial burden, you may not receive as much help as you thought. Unfortunately, student loans and bankruptcy do not mix well. When you have student loans, under current laws as of September 2010, you are generally not able to discharge them in bankruptcy except in all but the most extreme of cases.
Student Loans in Bankruptcy
Special rules and laws protect student loan lenders and make it much more difficult for people to get rid of student loans by filing bankruptcy. Under current laws as of 2010, you are not able to discharge any student loan debt in bankruptcy- owed to either government or private lenders- unless you can prove that repaying it would cause an undue burden.
This is an almost impossible standard to meet, as you essentially have to prove that there is no way you will ever, now or in the foreseeable future, be able to pay back the student debt that you owe. Showing that you don’t make very much money and that you have high student loans isn’t enough, nor is showing that your degree hasn’t qualified you to make a high income. Even not finishing your degree and working for minimum wage won’t usually convince a judge that debt repayment is an undue burden.
Typically, in order for a bankruptcy judge to find that student loans will cause an undue burden, you essentially must able to prove you’ll never be able to produce enough income to pay even a portion of them back. In most cases, the only people who meet the undue burden standard under current laws are those who have become permanently disabled or unable to work.
Changes to the Law About Student Loans and Bankruptcy
This sounds hopeless for those students who are in bankruptcy and trying to get rid of student loans, and under the current law, it largely is. However, don’t give up yet, as student loans and bankruptcy laws may be changing.
The Fairness for Struggling Students Act was proposed in April of 2010. The purpose of the act is to make some private student loans easier to discharge in bankruptcy. Since private student loans tend to have higher interest rates and less forgiving repayment plans than government loans, such as Stafford and Perkins loans, the bill promises to provide relief for students struggling with especially burdensome student loan debt- if it is passed.
Other Student Loan Options
In the meantime, if you are struggling with student loans, you do have other options. For example, you may wish to try to consolidate your student loan debt with a government lender such as the US Department of Education, through their Direct Loans service. Loan consolidation can lock in a low interest rate on variable government loans, and you may find yourself with more repayment options available, including an income contingent one where your payment is set as a percentage of your income and where the unpaid balance remaining on any loans is forgiven after 25 years of payments.
Getting Help
Before declaring bankruptcy, it is important you speak with a bankruptcy attorney. Your lawyer can explain to you whether the type of debt you are dealing with is dischargeable and can also assist you in determining what type of bankruptcy you are eligible to file in light of your income.