Student loan debt is an epidemic in the United States. In the early 1990s, less than have of students graduating with four-year degrees had student loans. Today, it is estimated that approximately 68% of students graduating with a four-year degree have student loans. According to one source, student loans have been increasing at a higher rate than family income. Many students have no choice but to seek all sources of financial aid, including student loans, to attend college.
Unfortunately, many graduates are unable to pay back student loans, especially those with substantial student loan debt. After years of struggling to pay student loans, some individuals may have no choice but to file for bankruptcy relief. However, those individuals may be surprised to learn that student loans are non-dischargeable in bankruptcy.
A Chapter 13 case can place the student loans in deferment until the bankruptcy is completed but the student loans continue to incur interest during the bankruptcy case. At the end of the bankruptcy case, the debtor may face an even higher student loan payment. The good thing is that with all other unsecured debt discharged, the debtor is in a better financial position to resume the student loan payments.
Is There an Exception to The Rule?
As with most things, there is an exception to the general rule that student loans aren’t dischargeable in bankruptcy. In some cases, a debtor may be able to discharge a student loan. However, the debtor must meet very strict requirements to be eligible to get rid of student loans in a bankruptcy case.
A debtor may be able to discharge his or her student loans in a Chapter 7 bankruptcy case if all the following conditions are met:
- Requiring the debtor to pay back the student loans will render the debtor unable to maintain a minimal standard of living for himself and his family.
- The debtor’s current financial situation is expected to continue for the remainder or a significant portion of the remainder of the student loan repayment period.
- The debtor has made a good faith effort to repay the student loans.
A judge determines if the debtor has met the above requirements for discharging student loans. In order to have the judge hear the matter, the debtor must file a motion with the court for discharge of student loans. The court will schedule a hearing at which the debtor must present evidence to convince the court he qualifies for a discharge. The student loan lender has the right to object to the motion and appear at the hearing.
One of the most difficult requirements to meet is the “good faith effort” to repay the student loans. The Bankruptcy Code doesn’t specifically address the definition of a good faith effort. Therefore, judges are left to make the decision based on the evidence presented at the hearing.
Some judges have determined that a good faith effort requires that the debtor has paid the minimum payments on the student loan for at least five years before filing for bankruptcy relief. This standard is subjective and can change from state to state.
What Can I Do If My Student Loan Is Not Dischargeable?
For debtors who must pay their student loans after filing bankruptcy, below are some things they can do to help them as they work to get rid of this final debt problem.
- Make a budget and live within that budget. All debtors are required to complete a credit counseling course and a debtor education course as part of the bankruptcy filing. The information learned in these courses can be very helpful in creating and maintaining a workable budget.
- Read the fine print of your student loan contract. Many contracts provide details about requesting and receiving assistance if you cannot pay your student loans.
- Talk to your student loan lender. Many companies have options to help individuals who are struggling with payments.
- Choose an automatic draft. Some companies offer lower interest rates for automatic draft.
If you are having trouble with student loan payments, seek advice from a professional with experience in bankruptcy law.