Student Loans in Bankruptcy

By Jim Ince

It is a generally known fact that student loans are almost never eliminated (“discharged”) in bankruptcy. However, bankruptcy relief often helps consumers with student loan debt in other ways, and there are some non-bankruptcy avenues to help provide relief.

The filing of a bankruptcy petition stops all creditor activity against the borrower, including the collection of student loans. This means, at a minimum, that a borrower can get some temporary breathing room while the bankruptcy is pending, which can be for as long as five years. This essentially becomes a “forced deferment” of the loan.

Upon successful conclusion of the bankruptcy, the debtor receives a discharge of debt. As this is the goal of most bankruptcy filings, this means that most discharged consumers will emerge from the bankruptcy with significantly less debt and ideally more disposable income with which to rebuild their lives and start paying their non-dischargeable debts, such as student loans and taxes.

In certain circumstances, student loans can be discharged in bankruptcy. This requires a court finding that keeping the debts would impose an “undue hardship” on the debtor. Courts ruling on this issue have essentially required that a borrower exhaust all workout arrangements with the student loan lender (see below) and that there be some factor present that permanently reduces or eliminates a borrower’s ability to ever pay the debt in the future, such as a permanent disability or other life-altering development. For most consumers, this puts the “undue hardship” discharge of student loans out of reach under current law.

Student loan workouts with the Department of Education can be researched at http://www.ed.gov/fund/grants-college.html. Check out your options and be proactive here; defaulting on payments and avoiding the problem is a mistake. Many student loans can, through collection activity, transform into wage and bank account garnishments.

Give us a call at Bailey & Galyen to discuss your student loan and other debt issues.

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