Student loans and bankruptcy: 3 considerations

Student loans may qualify for discharge through bankruptcy.

The founders of our country set up a bankruptcy program to help those who struggle financially. Applicants that meet certain requirements can have qualified debt forgiven. This translates to a fresh start after bankruptcy.

One segment of our population that has faced serious financial struggles are those who take out student loans. Applicants use these loans to fund secondary education opportunities. Unfortunately, even when these candidates find employment they may not be able to manage their student loan debt. It seems like this segment would make a prime candidate for a fresh start. Unfortunately, in reality, it can be extremely difficult to get debt from student loans discharged through bankruptcy.

This looming debt can make it difficult to purchase home and move on with one's life. So what options are available? Although it is generally more difficult to discharge student loan debt through bankruptcy, it is not impossible. Two questions to ask when trying to develop a solution to manage student loan debt include:

  • Is this loan leading to undue hardship? There is an exception that allows for the discharge of student loan debt through bankruptcy if the applicant can establish that the loan results in undue hardship. An applicant must establish various elements to prove that he or she faces undue hardship as a result of these loans. Examples include an inability to maintain a minimal standard of living, good faith efforts to repay the loan and the unlikelihood that the applicant's future financial situation will change.
  • What type of loan is it? The type of loan can impact whether or not it will qualify for discharge through bankruptcy. Federal loans generally offer a repayment program called income-driven repayment (IDR). This flexible repayment option is designed to adjust to the borrower's ability to make payments. As a result, it can be difficult to establish that the payment translates to undue hardship. Private loans, in contrast, do not generally offer these types of plans. This can make it easier to establish undue hardship because the payment is set.

It is possible that the laws governing student loan discharge through bankruptcy will change. The Federal Register recently issued a Notice by the Education Department requesting information from borrowers about their struggles with undue hardship. This could signal the potential for change.

In the meantime, those who are struggling with finances are wise to discuss their legal options. An attorney experienced in student loan debt relief can review these options and help you find a solution that works best for your situation.