Those who are drowning in overwhelming debt often consider claiming bankruptcy, thinking that all their financial problems will be wiped away. While this can sometimes be the case, it does depend on the type of debt and the chapter of the bankruptcy code that you choose to file under. Student loans can provide an opportunity to study at a post-secondary level to individuals who may otherwise be unable to pay the costly amount; however, if they cannot find a good-paying job following graduation, the loan repayments can be crippling. If you are wondering – will bankruptcy affect my student loans – the answer is in all probability it will definitely not.
There are two different types of debts, those that are dischargeable and those that are not. Student loans, whether they are private or federal, are treated as non-dischargeable. This means that your student loan will survive a bankruptcy claim and require paying in full at the end of your bankruptcy procedure. The only way this can be overridden is if you file a petition called an Adversary Proceeding in order to get a determination make by a judge. If you have forgotten to do this or if your circumstances change, you can reopen your bankruptcy case to add it at a later date, usually without having to pay any additional fees.
The process of trying to get your student loans discharged requires that you prove you and your dependents are suffering from “undue hardship” as a direct result of having to make the loan repayments. The Brunner Test is most commonly used to determine whether your specific case fits the requirements of discharge, but some courts may be more or less flexible on this matter. Basically, you must be able to show three things:
1. You are unable to maintain a minimum standard of living for you and your dependents.
2. Your situation is going to last for a long period of time or possibly forever.
3. You have made good faith efforts to repay the loan prior to filing for bankruptcy.
First of all, it is very difficult to prove that your situation is a long-term one, unless you have a disability or serious debilitating illness. It will also depend on the individual judge as to whether they think you should be able to maintain a minimum standard of living. In some cases exceptions are made for those in low-paying yet helpful positions, such as those working with young children, the disabled, or in shelters.
Generally, those considering filing for personal bankruptcy do so under Chapter 7 of the U.S. Bankruptcy Code. This is the traditional notion of bankruptcy that involves the liquidation of all non-exempt assets in order to pay off creditors. Since it is very difficult to get student loans approved as dischargeable debt, perhaps it might be better to consider filing under Chapter 13 instead.
Chapter 13 of the U.S. Bankruptcy Code is an individual’s reorganization of debts to make payments more manageable. First of all, the same eligible debts will be discharged as in a Chapter 7 case, and the automatic stay will ensure that you will be protected from any collection, harassment, or wage garnishing until your bankruptcy is resolved. Since Chapter 13 involves presenting the courts with a repayment plan, you will then have to follow that under the guidance and control of a court-appointed trustee. You will have a period of 3-5 years to repay anywhere from 0-100% of your debt, depending on your individual situation. During that time interest may still accrue, but you may be able to defer it during the course of your Chapter 13 bankruptcy. Since your student loan will survive the bankruptcy and still need to be repaid in full following the bankruptcy, some judges may allow you to give priority to your student loans during the repayment period.
Neither Chapter 7 nor Chapter 13 of the U.S. Bankruptcy Code will be able to discharge your student loan debt unless you get a judge to approve your petition to include them. At which point you will have to prove that your situation meets the criteria to make it eligible. If you are unsure which decision is right for you, it would be wise to consult a qualified bankruptcy attorney who will be able to explain the pros and cons of each chapter to you. They will also be able to look at your individual situation and advise you whether bankruptcy will be able to affect your student loans.
To find out if bankruptcy is right for you, consider filling out our free bankruptcy evaluation.