What you need to know about bankruptcy and student loans
Student loans have outpaced both credit cards and medical bills as a leading source of debt in the United States, and a growing number of borrowers are having trouble keeping up with the payments on their educational loans. According to data released by the U.S. Department of Education in 2013, one out of every 10 people with recent educational loans defaulted on their payments within the first two years.
Unfortunately, discharging student debt through bankruptcy has become increasingly difficult in recent years. Although some legislators and consumer advocates have begun pushing for new legislation that would make it easier to discharge educational loans in bankruptcy, the outcome of those efforts remains to be seen.
The “Undue Hardship” standard
Borrowers who wish to have student loans discharged in Chapter 7 bankruptcy are required to prove that repaying those loans would create an “undue hardship” – a higher standard than is applied for other types of debt, and one that is notoriously difficult to meet.
Showing an undue hardship typically requires proof of the following three elements:
- The borrower’s current income and expenses make it impossible to maintain a minimum standard of living.
- The borrower’s financial circumstances are unlikely to change for a substantial portion of the intended repayment period.
- The borrower has tried in good faith to repay the loans.
Although student debts are often difficult to discharge through Chapter 7 bankruptcy, there are still ways that bankruptcy can help student borrowers get out of debt, even if those loans cannot be discharged.
For example, borrowers who are able to eliminate other debts such as credit card balances or medical bills through Chapter 7 may find it easier to keep up with any remaining student loan payments. Another option for some borrowers may be to seek relief through a different form of bankruptcy known as Chapter 13.
Chapter 13 bankruptcy and student debt
For some people who are struggling to keep up with unmanageable student loan payments, Chapter 13 bankruptcy may offer another potential solution. In contrast to Chapter 7 bankruptcy, which allows certain debts to be discharged in a relatively short time frame, Chapter 13 involves prioritizing debts and creating a manageable payment plan that will typically remain in place for three or five years.
Chapter 13 bankruptcy can protect borrowers from foreclosure and other collection actions while giving them a chance to catch up on their debts. Because student loans are treated in much the same way as other debts in this type of bankruptcy, it can be an attractive option for borrowers who have fallen behind on their educational loans.
Talk to a lawyer for help
To learn more about bankruptcy and other debt relief options that may be available if you are struggling with student loans or other debts, be sure to speak with a qualified bankruptcy lawyer in your area.