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Personal Bankruptcy : Student Loans Dischargable in Bankruptcy?

Personal bankruptcy can seem like a good idea for many Americans struggling with paying back part of the nearly $1 trillion dollars of student loan debt in the United States today.

The American Student Assistance Program reports that there is roughly $864 billion in outstanding Federal Student Loan debt and another $150 billion in private student loan debt.

Wouldn't bankruptcy help?

Not so fast.

When Congress created legislation that started federally backed student loans it added language that only allows for the discharge of student loan debt if there appears to be an "undue hardship."

What's an "undue hardship?"

The courts have developed a legal "test" --a set of rules regarding what an undue hardship means -- that sets out the three requirements in order to qualify for an undue hardship. The requirements are:

1) You are unable to maintain a minimum standard of living due to your student loan repayments;

2) Your hardship is such that it is long-term and out of your control; and

3) You have made a good faith effort to repay your student loans.

The question of whether you qualify for an undue hardship will usually turn on the question the second step of the test raises: Is your disability long-term and out of your control?

That typically has been held that there needs to be some kind of disability or illness that has affected your ability to maintain a standard of living that allows you to pay your student loans.  This is a very hard threshold to prove.

In a Chapter 7, the only benefit for your student loans is a small reprieve from collection efforts due to the automatic stay.  Your loans will not be under collection during your bankruptcy, but they will gain interest during this time period.  Once you receive your discharge, your student loans will go back into regular repayment.

In a Chapter 13, you will have to pay a small amount to your student loans every month as part of your plan.  You might be able to pay a more significant amount every month.  This will depend on each situation.  The benefit is you will be able to bring your loans under control during this time period.  Your regular repayment will resume once your Chapter 13 plan is complete.

Unfortunately, bankruptcy does not provide a huge relief if you are struggling with student loan debt.  If you have other debt on top of the student loans there might be a greater benefit to consider personal bankruptcy.

Call any time to schedule a free initial consultation to go over your individual situation.

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