3 Things You Should Know About Bankruptcy And Your Student Loans

Posted on: 27 March 2015

Student loans are some of the biggest debts that many Americans carry. The average student loan debt for students who graduated in 2012 was more than $29,000. With those numbers in mind, it should come as no surprise that many people who consider bankruptcy also struggle with student loan debt. However, while bankruptcy may be an effective way to deal with mortgages and credit card debt, few people wrestling with student loan debt find their answer in bankruptcy proceedings. Why not? The answer is not as simple as you might think. Take look at what you need to know about filing for bankruptcy when you have student loans.

Exempt Debts

The reason that bankruptcy isn't usually a useful tool when it comes to dealing with student loans is because student loans are generally considered to be exempt from debt discharge, along with certain other debts like child support payments and personal injury lawsuit judgements. In other words, these debts cannot be wiped out by a bankruptcy filing.

Many people mistakenly interpret this to mean that bankruptcy can't help with student loans at all, but this is not the case. The exemption from discharge applies mainly to Chapter 7 bankruptcy filings. Chapter 7 cancels non-exempt debt after the debtor liquidates certain property and turns the proceeds over to the creditors. However, if you file for a Chapter 13 bankruptcy, you'll find that you can include your student loans in your repayment plan, possibly reducing the amount of money that you will pay each month on those loans. So, student loans are not exempt from bankruptcy proceedings, they're just exempt from discharge when it comes to Chapter 7 filings.

Student Loan Exceptions

Even if you're filing a Chapter 7 bankruptcy, you may still be able to have some or all of your student loan debt discharge. The law includes an exemption for people who face certain hardships. If you qualify for the exception, you may be able to have your student loan wiped out.

The truth is, most people assume that they won't get an exception, or don't know about the exception, so they don't ask for it. 99.9% of people that have these debts don't ask for this exception. It might surprise you to learn that when people do ask, 40% of them are approved.

It takes a little more effort to ask for a student loan discharge. You'll need to file for it separately, using a lawsuit called an adversary proceeding. You'll also have to show that paying back the loan would hurt you financially, that you probably won't be able to repay the loan during the repayment period, and that you've made efforts to payback as much as you could. If you can do that, you may well be granted an exception, and the judge will wipe out your credit card record.

Things May Be Changing

In 2013, after ten years of court appearances, a former law school student finally succeeded in getting his student loans partially discharged. While ten years of legal wrangling might not seem like good news, the cases set some positive precedents for future debtors who wish to discharge student loans.

For example, despite arguments that the debtor should get another job or give up certain expenses, or that the debtor's wife should work more hours, the court found that the debtor's current expenses and working hours were reasonable, and that he did not need to work more hours or give up expenses in order to be approved for the discharge. That precedent might make it easier for the next debtor to prove that paying off the student loans would result in an undue hardship.

If you're struggling with student loans and considering bankruptcy, you should consult a bankruptcy attorney for advice about having your student loans discharged. For this complex legal procedure, you need an experienced attorney on your side.