What is Dischargeability of Student Loans?
With the rising cost of education and a difficult job market, student loans are becoming harder and harder to pay off. You may be wondering if filing bankruptcy can help you get rid of these student loans like it can help you get rid of credit card debt.
Dischargeability of student loans, refers to the whether these loans can be generally or specially discharged, or gotten rid of, in a bankruptcy case.
Q: Are student loans generally dischargeable in bankruptcy?
A: Generally, student loans are difficult to get rid of in bankruptcy, and only someone with very specific personal circumstances can succeed in doing so.
Q: What circumstances must exist to discharge my student loans?
A: You must show that being forced to pay your student loans will cause you undue hardship.
To show undue hardship, you must show the court three things:
First, you must show that after accounting for your income and expenses, you cannot support a minimal standard of living for you and/or your dependents.
Second, these must be some circumstance in your life that will keep you from being able to repay your student loans for the better part of the repayment period. This would be something like a chronic illness or disability, but not unemployment.
Third, you must demonstrate that you have made a good faith effort to pay down your student loans. Beyond making payments in the past, you must show that you have exhausted all potential other means are paying the loans. These would include extensive efforts to increase your income, such going back to school to get additional education, as well as consolidating your loans through a consolidation service.
If you are able to show that the above circumstances exist, then your loans may be fully or partially discharged with the rest of your debts at the end of your case.
Q: Can undue hardship be shown through a standard bankruptcy petition?
A: Since the discharging of educational loans in bankruptcy is generally not allowed, you must use a special procedure called an “adversary proceeding” to get these loans included in your bankruptcy case. An adversary proceeding is basically a trial contained within your bankruptcy case.
At this trial, you will have to present evidence to a judge or jury that your student loans are causing you an undue hardship. Your lender, however, will be able to put on evidence to the contrary.
Q: If I cannot show undue hardship, are there any other options?
A: If you are struggling with your student debt but cannot meet the requirements, there are other options. One possible alternative is to negotiate with your lender to get placed on an income-based repayment plan or deferral.
Another option is to place your student loans, along with other dischargeable debts, into a Chapter 13 bankruptcy case. In Chapter 13, you create a 3 – 5 year repayment plan in which you repay some or all of your debt, based on your monthly disposable income. Since priority debts, such as student loans, must be repaid before other debt, the priority debts can be used to bump out nonpriority debts where there is limited monthly disposable income
Thus, the presence of the student loans may actually help you to repay your other creditors less than you owe them or nothing at all.
While it is possible to discharge student loans in bankruptcy, the advice of an experienced bankruptcy attorney is needed to determine whether it is possible or worthwhile for you to try to do so.
As you will need to use an adversary proceeding to get your student loans included in your discharged debts, there are additional costs associated with seeking to get rid of student loans.
If your lender does not oppose you at your trial, these costs might be somewhat low. However, given that the state of the law currently favors student loan lenders, opposition to your case is likely. The result of this opposition is that a full trial might be necessary, and this can be very expensive and yield uncertain results.
The decision to seek the discharge of your student loans in bankruptcy is one of the riskiest decisions in the area of bankruptcy, and the advice of an experienced attorney should be sought.
Why Wadhwani & Shanfeld?
At Wadhwani & Shanfeld, we understand the very special set of circumstances that need to be present to make attempting to discharge your student loans a worthwhile endeavor. If you are not a good case for this, we will be very honest with you so that you do not waste your money. The same cannot be said of other attorneys who may be more interested in generating business for themselves rather than looking out for their clients’ best interests.
Feel free to call our office to set up a free consultation to learn more and get your questions answered.