Clark & Washington

Can Student Loans Be Discharged in Bankruptcy?

Student loan discharge is not automatic in bankruptcy like so many other types of debt. In many cases, you cannot get student loan debt discharged. However, there are circumstances where student loans may be discharged if you can meet necessary requirements.

It’s essential that you work closely with a student loan bankruptcy lawyer if you want to get your student loan debt forgiven. The U.S. Department of Education will not automatically discharge your student loans. You must go through an involved legal process that will be complex and requires special knowledge.

How Can I Get My Student Loans Discharged in a Bankruptcy?

You cannot get your student loans discharged through a traditional bankruptcy process. Instead, you must file a separate action known as an “adversary proceeding.” This will request the bankruptcy court to find that repayment of your student loans will impose undue hardship on you and your dependents.

The adversary proceeding will take place through the bankruptcy court, and your creditors may be present to challenge your request. They will likely have multiple attorneys on their side. You should have a bankruptcy lawyer on your side also to protect your rights and prove that your student loans impose an undue hardship on you.

What Is Undue Hardship According to the Bankruptcy Court?

There is no single test that bankruptcy courts universally use to determine what is undue hardship. However, they do look at an array of factors to determine if repaying your student loans would be an undue hardship. Some of those factors include:

Your student loan bankruptcy lawyer will need to present information about your current finances as well as how your student loans impact your life.

What If the Bankruptcy Court Determines Repayment of My Loan Would Be an Undue Hardship?

If the bankruptcy court decides during the adversary proceeding that repayment of your student loan under current terms would be an undue hardship, there are multiple possible outcomes.

Your student loan may be completely discharged. You would not have to repay any portion of your loan and collection activity will stop.

Your student loan may be partially discharged. This would require you to repay a portion of your student loan. However, the bankruptcy court might alter existing loan terms.

The bankruptcy court may require you to repay all your student loans, but with different terms. For example, the court may adjust or lower your interest rate, which can help you pay the loan off faster with less hardship.

The goal of the bankruptcy court is to find a solution that does not present an undue hardship to you, as a consumer, but that is fair to the creditor as well.

What Should I Do If the Bankruptcy Court Doesn’t Discharge My Student Loans?

If the bankruptcy court does not discharge your student loans, you still have options that can help you remain in good standing with your creditors.

When you file Chapter 7 bankruptcy, the majority of your unsecured debt will be discharged and eliminated. Your assets may be liquidated, and other debts paid as much as possible. This will free up money that you can allocate to your student loans.

If you file Chapter 13 bankruptcy, you can include your student loan payments in your repayment plan. This will give you three to five years to catch up on past due payments and secure a better financial situation.

Additionally, you can explore different repayment plans to find one that fits your financial situation. Your student loan attorney can contact your loan servicer to discuss repayment plan options that would work for you. For example, you may be able to pay much less under an income contingent repayment plan that is based on how much you earn.

Why Can’t Student Loans Be Discharged in Bankruptcy?

Lawmakers made it difficult to discharge student loans because they were originally concerned that students would borrow substantial sums of money to pay for college and then file bankruptcy immediately after graduation.

Instead, politicians have created a system that benefits student loan creditors who charge excessive interest rates and trap individuals in repayment plans that are impossible to overcome. Many people have so much student loan debt that they will be paying it for decades.

What Happens to Student Loans During Bankruptcy?

Student loan creditors cannot harass you during bankruptcy. When you file Chapter 7 or Chapter 13, the bankruptcy court issues an automatic stay. This will stop all creditor collection actions against you, including excessive calls, wage garnishment, and other efforts to get money from you.

Your student loan bankruptcy attorney can help you figure out how to manage your student loans while you are in the process of bankruptcy so that they do not continue to haunt you afterwards.

Eliminate or Manage Student Loans When You File Bankruptcy

Although student loans cannot be discharged through bankruptcy, it is possible to eliminate them if you can prove they impose an undue hardship on you and your dependents. The required adversary proceeding will allow your student loan creditor to challenge discharge, so it is important for you to have a bankruptcy lawyer by your side.

Call the student loan bankruptcy attorneys at Clark & Washington at (865) 689-1777 to discuss your financial options.

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