Will Bankruptcy Discharge Student Loans?

One of the most asked questions is"Will bankruptcy discharge student loans?"

Former students often wonder, when considering filing for bankruptcy, what will happen with their student loans. They want to know if their loans will be discharged in the bankruptcy or not.

As recently as 1998, it was much easier to discharge student loans in bankruptcy than it is today. The law changed that year, representing a policy of discouraging discharge of student loans. The law was established because many students were taking out student loans for amounts much higher than what they actually needed. Then they’d graduate and file for bankruptcy to get their loans nullified. Today, filing bankruptcy will not automatically eliminate the need for repayment of college loans. Congress felt that too many students were taking advantage of bankruptcy, and which in turn harmed the student loan program itself.

Then in 2005, Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, privately funded student loans are now treated the same way that loans funded and guaranteed by the federal government or nonprofit institutions. Prior to the new law, if you had a loan from a private-sector lender that was not guaranteed, it could be discharged under chapter 7. The new law gives these loans the same protection as the guaranteed loans.

Even though it currently is very difficult to do so, it is still possible to discharge student loans in bankruptcy. The attorneys who are willing to discuss such possibilities will do so on a case-by-case basis as they see fit. In order for loans to be discharged, it must be proven that the borrower experienced significant hardship while attempting to repay the loans.

Student loans are not dis chargeable in bankruptcy unless you can show that your loan payment imposes an "undue hardship" on you, your family, and your dependents. Non-dis chargeable debts are those debts that you cannot totally eliminate when you file for bankruptcy and will have to be paid by you.

It is very difficult to prove significant hardship, because you must also prove that the future does not hold the promise of a brighter day. In addition, bankruptcy rules do not bother to spell out what ‘hardship’ actually means. Instead, there are some general guides about granting discharges.

It is almost impossible to show an undue hardship unless you are physically unable to work and the chances of your obtaining any type of gainful employment in the future are non-existent.

So it seems the answer to that question "Will bankruptcy discharge student loans?" seems to be "No."

Will Bankruptcy Discharge Student Loans?
It All Depends on How You Answer These Three Questions

INCOME

DURATION If a your income is inadequate, how long will you remain at this income level? For example, a disability or other life-changing event may have occurred after graduation, as evidenced by a disability determination, or even a lawsuit showing permanent disability.

GOOD FAITH This is an all-important test. Can you prove that you have made every reasonable effort to repay the loan?

One of the most accurate ways to measure the possibility of discharge is to really consider for yourself whether bankruptcy is actually necessary. If you are financially stable except for student loan debt, for example, you cannot expect to discharge only student loans. Although there are exceptions to this rule, it overwhelmingly applies.

In general, courts no longer discharge student loan debt in bankruptcy. However, it is currently expected that if default rates rise, courts’ positions almost certainly will change.

In the end, the future of student loan debt in unknown. Whether or not it can be discharged in bankruptcy now does not dictate what will be possible down the road, and if default rates rise discharge might be a likely possibility.

So, to answer the question of whether or not will bankruptcy discharge student loans - probably not. However, the reduction of debt might make it easier and allow you to pay your loans without financial stress.

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