What happens with student loans during bankruptcy?
Can I include my student loans in my bankruptcy? Are there qualifications I have to meet? What is the process? Is it different than a “regular” personal bankruptcy?
Student loan debt is likely to be the next bubble that bursts in our economy. Today, there is over $1 trillion in federal student loan debt! The problem with student loan debt is twofold.
First, college is much more expensive now. The increase in the cost of college has increased year after year while wages have remained stagnant.
Second, expenses are increasing for other necessities (cell phones, rent, and basic living needs).
So people who are working are not making as much with their degree and on top of that expenses for basic living needs have increased. This is essentially making it very difficult for someone to get into the middle class.
So, how can bankruptcy help?
For most people, when you file bankruptcy, you are not required to pay your student loans back while you are in bankruptcy. So if you are in a 5 year bankruptcy, you would not be required to pay your student loans. This means they would not be able to garnish your wages or go after your tax refund. However, while you are in the bankruptcy, interest is still accruing on those loans — so when you get out you are going to owe more than you did before. The hope is that Congress gets around to adopting some serious legislation that helps deal with the debt.
In rare cases, you may be able to wipe out your student loan debt in bankruptcy. This does not happen very often, but if you are able to show that the student loan debt creates an undue burden on your finances you may be eligible to get them discharged. This standard is interpreted very stringently. I have successfully discharged student loan debt for a client. The facts in that case were very compelling. My client began having serious medical issues in 2007 and his health condition continued to decline. In 2009, my client was unable to work due to his health problems. As a result of the health problems, my client went on social security disability. Under these facts, we were able to discharge his student loan debt because we established that my client would experience a minimal standard of living if required to repay the loans, that his current state of affairs preventing him from earning a living were likely to persist for a significant portion of the repayment period, and that he had made good faith attempts to repay the debt.
If you think you may have similar circumstances that are preventing you from repaying your student loan debt, consult with an attorney and see if you may be eligible for a bankruptcy discharge.