Filing for Bankruptcy Over Student Loan Debt

Although student loan debt is classified for bankruptcy purposes as unsecured debt, it is not treated in the same way as credit card debt, personal loans, and other unsecured debts. Whereas as credit debt, personal loans, medical bills, certain taxes, and other unsecured debts are dischargeable in bankruptcy, student loan debt generally is not dischargeable.

Chapter 7 Bankruptcy and Student Loan Debt

When a debtor files Chapter 7 bankruptcy over student loan debt, the automatic stay prevents the student loan servicer from making any collection efforts against him during the pendency of the case. If the student loan servicer has initiated an administrative garnishment to collect the debt, it must immediately cease and desist from any further garnishment activity. Once a Chapter 7 debtor receives a discharge, the student loan servicer may resume collection efforts against the debtor.

Chapter 13 Bankruptcy and Student Loan Debt

If a debtor files Chapter 13 bankruptcy, as with a Chapter 7 case, the automatic stay prevents the student loan servicer from making any collection efforts against the debtor. As a part of the Chapter 13 process, the debtor must file a Chapter 13 plan which sets forth his proposal for how he will repay his debts. The Chapter 13 plan must specifically address how the student loan debt will be paid. The debtor may propose to either make his payments directly to the student loan servicer or to make the payments through the Chapter 13 plan. If the student loan has not been paid in full at the conclusion of the Chapter 13 case, the debtor is responsible for paying the balance according to the original loan terms or modified terms approved by the servicer.

What is a Hardship Discharge?

There are instances when a debtor may obtain a hardship discharge of student loans. To obtain a hardship discharge, the debtor must file a Complaint to Determine Dischargeability and prove to the court that:

Making the student loans payments would prevent him from maintaining a minimum standard of living for he and his dependents based on his current income and expenses;
That his current financial circumstances are likely to persist for a significant remainder of the repayment period; and
That he has made a good faith effort to repay the student loans.

In some jurisdictions, the debtor may also have to show that he first applied for Income Based Repayment and that even with the reduced payments, paying the student loans still presents a substantial hardship.

Getting Legal Help

Although student loans are not dischargeable in bankruptcy, using bankruptcy to eliminate other unsecured debts may enable you to make your student loan payments. If you have defaulted on your student loan, you should contact an experienced bankruptcy attorney in your area to discuss the differences between Chapter 7 and Chapter 13 bankruptcy and which option is best for you.

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