Can student loans be written off in a bankruptcy?
Mathew S asks: I am filing for bankruptcy and have several student loans. Can student loans be written off in a bankruptcy? Or do I still have to repay my student loans? Help! I need some student loan advice quickly!
Student Loan Guru: Under most circumstances Federal student loans cannot be discharged in bankruptcy. Isn’t it convienent the way the U.S. Government set this up? Many times, student loans are the reason many young people get into financial trouble.
There is one exception to this rule. That is if you can show that repaying the student loan will cause “undo hardship” on you and your family. But I wouldn’t count on this. It’s very, very difficult to prove. Most of the time this will include proving to the court that you will be physicall or mentally incapable of working to repay your loans.
There are some mis-information out there that state that you can discharge student loans on your bankruptcy if you’ve been paying on them for 7 years. This is no longer true and hasn’t been for quite some time. So you can’t count on this either if you’re planning on filing bankruptcy to wipe away your student loan debt.
There was a time before the 2005 bankruptcy law passed where you could have private student loans discharged, but lenders and their lobbyist worked hard to get this changed with the 2005 Bankruptcy Abuse and Consumer Protection Act of 2005. Now, no longer can your private student loans be discharged, they’re treated just like a Federally backed student loan.
If you think you can prove ‘Undo Hardship’ to the bankruptcy courts, here’s what you’ll need to do. First, you must file a separate motion with the bankruptcy court. Then you will need to appear before the judge to explain your hardship and why you can’t repay our student loans. This will not be an easy task, so if your student loans make up a large portion of your personal debt, you’ll be better off avoiding the bankruptcy courts. The courts are extremely reluctant to discharge student loans these days.
Your best option may lie with you trying to renegotiate the terms of your student loans with your lenders for a better repayment plan. You or the bankruptcy judge may be able to work out a plan with the lender if you contact them directly.
Have you gone through credit counseling? One thing you’ll want to avoid is paying a credit counseling agency to “clear up your credit”
Bankruptcy should be a last resort. Officially, it normally stays on your credit record for 7 years. But I’ve seen it haunt people for much longer than that. Don’t think that after 7 years you’ll have it all nice and rosey. A bankruptcy has a way of coming back and haunting you when you least expect it. It may not be right, but I’ve seen enough real world examples to know that it happens and happens fairly often.
Another option you may want to look at is student loan consolidation and/or private student loan consolidation if you have private loans. Unlike Chapter 7 bankruptcy above, a Chapter 13 may help you consolidate your student loans. Chapter 13 bankruptcy normally allows you to propose a repayment plan where you’ll be repaying your debt in 3 to 5 years. There are other factors involved with filing a Chapter 13 bankruptcy, so be sure to discuss them with your legal counsel. Oh and by the way, make sure you read our disclaimer/TOS. It says we’re not legal or financial experts so consult with the professionals before relying on any of this information. Also, don’t forget about …
