Bankruptcy Questions Answered

The Truth about Bankruptcy and Student Loans

College students and recent graduates are facing a particularly difficult financial landscape as they attempt to move from the classroom to the workplace: college tuition is more expensive than ever, meaning that most students rely at least in part on loans to cover their fees.

But, with the economy still sluggish, finding a job (and particularly a job that will allow them to cover their loans) is often a difficult feat.

And the scary truth is that student loans are very difficult to discharge in a bankruptcy filing. Here’s a look at what you can expect if you’re struggling to repay educational debt—and what your options might be.

Student Loans in Bankruptcy

In most bankruptcy cases, student loans constitute non-dischargeable debt, meaning that the bankruptcy court cannot legally forgive any money you owe. The exception to this rule is that if a filer can prove “undue hardship,” she might have her loans forgiven.

In order to demonstrate that paying back your student loans would cause you “undue hardship,” you must address the following:

• Standard of living: You need to show the bankruptcy court that, if you made payments on your student loans, you would be forced to live below a minimum standard of living. This may vary depending on where you live, so be sure to consult with a bankruptcy lawyer to determine whether you might meet this criterion.
• Duration of situation: You also need to prove that your current living circumstances (such as expenses and income) are likely to continue throughout the duration of your loans’ repayment period. In other words, you need to show that you’re not only poor now, but you’re likely to remain so for as long as you’d be making student loan payments.
• Effort of repayment: Finally, you have to demonstrate that you’ve honestly attempted to repay your loans but have found yourself unable to continue doing so while maintaining reasonable living standards.

Clearly, these criteria are not easy to meet—and it’s likely you might not even want to meet them. After all, none of us want to think we’ll be having the same difficulty finding work ten years from now that we’re currently having.

Dealing with Student Debt

If you don’t think you’re likely to have your student debts discharged by a bankruptcy court, you may want to consider these options for repayment.

• Filing for bankruptcy: No, that’s not a typo. If you’re stretched too thin by a variety of debts, filing for bankruptcy may allow you to discharge other debts (like those from credit cards) so you can funnel money to debts you have to repay.
• Applying for forbearance: Most student lenders offer graduates periods of forbearance, in which they’re not required to make payments on their loans. If you expect to be employed (or be earning more money) in the near future, this option may give you some breathing room.
• Negotiating: Finally, consider contacting your lender, explaining your situation and asking for altered loan terms that would allow you to make smaller monthly payments so you could stay on target.

Additional Resources

Repaying Your Student Loans