Thursday, December 6, 2012

Can Bankruptcy Eliminate Your Student Loans?

Can Bankruptcy Eliminate Your Student Loans?

While bankruptcy can provide you with a fresh start, current bankruptcy laws state that federally insured student loans are not dischargeable, unless you can prove in court that repaying the loans is an "undue hardship." The legal code does not include a definition of what is an "undue hardship."  In each jurisdiction, Judges apply a test to the debtor's circumstances.

Most jurisdictions use a 3 prong test; it requires a borrower to show 3 things:

(1) that the debtor cannot maintain, based on current income and expenses, a minimal standard of living for the debtor and dependents if forced to pay off student loans;

(2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and

(3) that the debtor has made good faith efforts to repay the loans.

While on the surface it may seem like you could qualify, subsequent cases show that it is extremely difficult to overcome the test in order to obtain dischargeability as Judges strictly rule on what is considered "good faith efforts" and "whether the state of affairs is likely to persist for a significant portion of the repayment period." Typically, people with income that does not exceed 150 percent of the poverty level are considered "low income individuals." But, don't forget the two other prongs of the test as all 3 must be met.


The filing of a Chapter 7 case does trigger protection of the "automatic stay." The lenders are supposed to cease any/all collection efforts until either a relief of stay motion is granted or the debtor's case closes post discharge or is dismissed. The creditors typically wait until the case closes and resume demands for payment. If there is no discharge of student loans, payment must resume.
If you or someone you know is having difficulty paying their student loans, we may be able to help.
Contact King and King today for a free bankruptcy consultation 404-524-6400.