A number of recent graduates have asked us about discharging their student loans in bankruptcy.
Student loans are generally non-dischargeable in a bankruptcy. This means that you cannot totally eliminate them, unless you can show the bankruptcy judge that your loan payments impose an “undue hardship” on you. It is almost impossible to show this type of “undue hardship” unless, for example, you are physically unable to work, or your chances of obtaining any type of gainful employment in the future are non-existent.
Nonetheless, there are still benefits to filing bankruptcy if you are burdened with student loans:
- You’ll be able to consolidate your student loan payments in a Chapter 13 bankruptcy. You’ll submit a repayment plan of all your debts to the bankruptcy court, in which you’ll propose how much to repay your creditors, and over what period of time. If the judge accepts your plan, your creditors will be also be forced to accept it. It’s very possible that you’ll be able to lower your repayments, and repay the loan over a longer period of time.
- In a Chapter 13 bankruptcy, you likely won’t need to pay interest, late fees or other penalties. All your repayments will go towards the principal amount you owe on your loan. If you and your lender disagree over what portion of the student loan constitutes principal and what constitutes other charges, you’ll be able to make an argument to the bankruptcy judge, who will then render a decision.
- Once you file for bankruptcy, your creditors, including your student loan officers, are prohibited from beginning or continuing collection actions against you. This includes harassing you with phone calls and letters.
- If you file a Chapter 7, you won’t be able to adjust the terms of your student loans, but you will be able to free up your money to repay your student loans because you’ll be able to discharge other debts.
For more information on this topic, or any other bankruptcy topic, call our offices at 702-880-5554.