Student Loans and Bankruptcy: How do I know if I’ll qualify?

Student loans are a large burden that many young Americans take on just out of high school. They do not always realize the magnitude of this debt or how many years it will take to pay it off until they find themselves in financial hardship following graduation. If you feel that your student loans are causing you a great deal of financial hardship, you may consider filing for bankruptcy.

Bankruptcy is a way for debtors to have some or all consumer debt discharged, including credit cards and medical bills. However, a typical bankruptcy does not include student loans. You may have heard that student loans are not eligible to be discharged in a chapter 7 or chapter 13 bankruptcy. The truth is that it is possible, but it is a more complicated process.

Your attorney will have to file a separate petition within the bankruptcy stating that paying the student loan back will cause an undue burden on the borrower. There is a simple three-part test that the court will use to determine whether or not you are eligible to have your loans discharged, according to the Federal Aid department of the US Department of Education:

  • If you are forced to repay the loan, you would not be able to maintain a minimal standard of living.
  • There is evidence that this hardship will continue for a significant portion of the loan repayment period.
  • You made good-faith efforts to repay the loan before filing bankruptcy (usually this means you have been in repayment for a minimum of five years).

If you do not meet these requirements, there are other options for you. You may be able to structure your repayments so that you can pay them based on your current income. You may also qualify for a forbearance, meaning a period of time during which you do not have to make payments. However, interest does accrue during this time.

If you feel that your student loan payments are causing an undue burden on you, please contact us. We can guide you through this process and advise you on the next steps to take.