Learn About Student Loan Bankruptcy Options

BANKRUPTCY OPTIONS FOR FEDERAL STUDENT LOANS

Many people remain unaware that declaring Chapter 7 or Chapter 13 Bankruptcy will not make you eligible for Federal Student Loan Discharge. It is rare, but bankruptcy discharge is possible under some circumstances. It will require the filing of an additional action (an Adversary Proceeding). In this hearing you must prove that being responsible for the repayment of your loans will cause undue hardship on you and your family.

Proving Undue Hardship to the Court

There are three main points of consideration that the court will use to determine undue hardship. If you have first filed for Chapter 7 or Chapter 13 Bankruptcy, and then an Adversary Proceeding you will have to show the following to have the Judge consider ruling in your favor.

  • You must have a history of payments on your loan(s). If you  are able to show the court that you have done your best to stay in good standing on your loans up until the time that you filed for bankruptcy, you have meet one requirement for a ruling or decision in your favor.
  • You must be able to provide evidence that your state of hardship is expected to last for an extended period of time. The Judge will need you to prove that the hardship will be suffered for a large portion of your remaining term in repayment.
  • Finally, you will need to prove that continual requirement to repay the loan will cause undue hardship on you and your family. The court will want evidence that repaying your loan would leave you unable to maintain a minimal standard of living.

Proving these three points to the court can be a scrupulous feat. It is also common for creditors to appear in court to dispute your claims.You will face even larger Attorney’s fee, time in court and away from your job or family, and the stress and pressure of proving your case to the Judge. Some may find the court cost, extended attorney’s fees, and exhaustive time from work/home a greater harm than seeking an IDR or relief program to satisfy their loans.

If the bankruptcy court rules against the discharge of your Student Loans, you do still have some options. Generally, the next step would be to verify you qualifications for Income-Driven Repayment Plans. This will allow an opportunity to reduce your monthly payments for a more comfortable fit based on your households discretionary income. Such a program may also offer relief of the loan balance at the end of your repayment term if you have satisfied all program requirements.

Ruling to Approve Bankruptcy Discharge on Federal Student Loans

Depending on the Judge’s finding or determination in your case, the amount that is discharged from your loans can vary. Here’s what could happen:

  1. You could receive a ruling for a full or total discharge. This will end any further request for payments to your student loans and discharge your balance in full.
  2. You could receive a ruling for a partial discharge. If this is the case, specification will be made as to what portions of the student loans you will remain responsible for. You will be responsible for securing  payment plan that will allow you to meet those requirements.
  3. If the Judge in your case rules against a bankruptcy discharge you will remain responsible for the entire balance of your student loans and it is your responsibility to satisfy the terms of the new repayment arrangements set forth.