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Can Student Loans Be Discharged During Bankruptcy

Can Student Loans Be Discharged During Bankruptcy

The current economic situation in the United States has led to an increase in bankruptcy filings. Many people are overwhelmed with mounting debt and are seeking fresh financial beginnings. Although student loans are difficult to discharge in Chapter 7 bankruptcy proceedings, it can be done. Student loans are not dischargeable under Chapter 13 bankruptcy, but are included in the repayment plan. The bankruptcy court will determine the amount that will be allocated for the repayment of student loans.

Discharge of Student Loans

The federal student aid program allows for a Chapter 7 bankruptcy discharge of student loans under limited circumstances. The Brunner test, based on a United States Court of Appeals decision, establishes certain criteria for the discharge of student loans.

  • The debtor cannot maintain a minimal standard of living if required to pay outstanding student loans.
  • The financial status of the debtor is expected to continue for the time period specified in the student loan payment agreement.
  • The debtor has made good faith efforts to repay the student loans.

The bankruptcy court will conduct a separate proceeding during which the discharge of student loans is determined. If you can provide financial evidence to establish that you and your family will suffer from an undue financial hardship if you are forced to repay student loans, they may be discharged.

A legislative bill entitled the "Private Student Loan Bankruptcy Fairness Act of 2011" has been introduced in the U.S. House of Representatives. The purpose of the proposed legislation is to amend Title 11 of the U.S. Code to modify the process required for the discharge of student loans. Once this bill passes, the bankruptcy court may become more lenient in its student loan discharge requirements.

Filing for Bankruptcy

Bankruptcy laws were enacted to help people with financial difficulties rebuild their lives and obtain relief from debt. Once you file for bankruptcy protection, creditors are prohibited from contacting you or attempting to garnish your wages or bank accounts. Foreclosure and repossession actions are automatically stopped. In most instances, you will be allowed to keep personal property and your home. A Chapter 7 bankruptcy will immediately discharge most of your debts, while Chapter 13 bankruptcy will allow you to pay your creditors over time. Although the discharge of student loans can be a difficult process, it can often be accomplished with the help of your bankruptcy attorney.