Student Loans and Bankruptcy

Dealing with student loans can be incredibly overwhelming. For many people, debt from student loans remains for years and years after graduation -- and they can become a hassle to manage alongside new debts, bills, and various other financial responsibilities. When payments get tough to handle, many people are tempted to turn to bankruptcy as a solution. Unfortunately, the truth is that bankruptcy generally does not provide much advantage for student loans, except in rare cases. This article will explain in further detail how student loans are dealt with in bankruptcy as well as other options you can possibly consider.

Exactly What Happens To Student Loans In Bankruptcy?

In a bankruptcy, certain types of debts are discharged (their balances cancelled) once the process comes to an end. Student loans, however, are generally considered non-dischargeable. That means that when the bankruptcy ends, student loans are not eligible to be discharged. The consumer remains entirely responsible for the remaining balance of the student loan, in spite of the bankruptcy. Even in a Chapter 13 bankruptcy, student loans can be included in the restructured repayment plan, but still will not be discharged at the end.

What is Undue Hardship?

There are rare cases where student loans become dischargeable. These exceptions to the rule are called cases of “undue hardship.” In these cases, the consumer filing bankruptcy must prove to the court that their case is so severe that having to pay the debt would present an extreme burden. It is usually extremely hard to meet the standard of undue hardship, and to meet the standard, consumers typically must pass the “Brunner Test” at the discretion of the bankruptcy court. The Brunner Test requires that you cannot maintain a minimum standard of living while repaying your loans, that your financial circumstances will very likely persist, and that you have so far made good faith efforts to repay the loans to date.

Alternatives to Bankruptcy When You Have Student Loans

 -Increase Financial Resources. If possible, seek out a better job or other forms of financial gain that will increase your disposable income. Also consider improving your budget and decreasing unnecessary expenses so that you can have more money to put toward student loan repayment.

-Consolidate your Loans. Loan consolidation can be significantly helpful for student borrowers, especially when you have many loans from different sources. Consolidating your loans into a single loan will enable you to find a lower interest rate and a longer repayment period, in addition to a single, easy-to-manage monthly payment.

-Negotiate with your Education Lender. If loan consolidation is not feasible, you can still negotiate with your student lender to improve your repayment situation. Contact your lender with information on your financial circumstances and explain the reasons why you are currently unable to pay. Make it clear that you would like to pay your debt responsibly, and ask about available options that could make repayment easier.