The Student Loan Bankruptcy Exception
As with all rules there is one exception: you can discharge a student loan in bankruptcy due to undue hardship. Undue hardship is defined as the permanent physical inability to work. You must prove in bankruptcy court that:
- You’re physically unable to work
- You’re likely to be unable to work for most of the loan term
- You’ve made a good faith effort to repay the debt
- Paying it would prevent you, your spouse, and your dependents from maintaining a “minimal” standard of living.
If you believe you qualify under these guidelines, see an experienced bankruptcy lawyer for help filing an adversary proceeding as part of your bankruptcy case.
How Bankruptcy Can Help with Student Loans
Although your student loan can’t be discharged in bankruptcy, a bankruptcy court may be able to ease an overwhelming debt burden. Some courts may discharge a portion of your student loans, but this is rare and varies by court.
In most cases, the judge will incorporate your student loans into your debt repayment plan under Chapter 13 bankruptcy. Any balance remaining after the payment plan ends will still be due, but your other debts should be paid off by then.
What to Do if You’re Heading Toward Bankruptcy
If your total debts have reached an unsustainable level and you feel you must file for bankruptcy, don’t simply stop paying your student loans. Not only are student loans not dischargeable in bankruptcy, but also the federal government has the right to assess stiff penalties, seize tax refunds and other government assistance money, and garnish your wages.
Lenders want to help you avoid default. Contact them for help applying for a deferral, forbearance, or extended repayment plan before the situation gets worse than it already is.