Yes a bankruptcy can clear or discharge student loans. Is it likely to happen? Most likely not.
In order to discharge a student loan in bankruptcy you must file an adversary proceeding. This is essentially a separate lawsuit against your student loan servicer in the bankruptcy case. In order to have your student debt discharged, you must be able to demonstrate that repayment would impose an undue hardship on you and your dependents.
The court looks at a variety of factors to determine undue hardship but it boils down to:
- if you were forced to repay the loan you would not be able to maintain a minimal standard of living.
- you must show evidence that the hardship will continue for a significant portion of the potential loan repayment period and
- that you made a good faith effort to repay the loan before filing bankruptcy.
Now if you are able to meet this burden, you can have your student debt fully discharged and you would not have to repay any of the remaining debt. Also, your debt could be partially discharged and you then may be required to pay some of the debt but not all, or you could be required to repay the loan under different terms or potentially a different interest rate.
Some good news is that even if your debt is not discharged, bankruptcy can provide relief from student loans. The filing of the bankruptcy puts the student loan into deferment. This means that while chapter 7 or chapter 13 is pending, you may not be required to make any payments.
For chapter 7, this may be for 6 months and for chapter 13, this can be up to 5 years or 60 months. This can be a significant tool if you are looking to delay the collection of student loans. This can allow you to reorganize your debt and to clear other unsecured debt, allowing you to be better suited to handle the student loans.
Make sure you talk with an experienced bankruptcy attorney to make sure you are taking advantage of all of your options with regards to your student loans.
If you have any questions about the topic discussed in this article, or any bankruptcy law matter, please give us a call at Bononi & Company 724-832-2499.