The amount of student loan debt has continued to grow. In the United States student loan debt exceeds 1 trillion dollars, and the national default rate is approximately 9%. While bankruptcy can be very effective in canceling credit card debt, medical & hospital debt, unsecured bank loans, and personal loans, student loans are more complicated.
Student Loans In Chapter 7
It is very difficult to cancel student loan debt in Chapter 7. This debt cannot be discharged unless the bankrupt can prove that the survival of this debt imposes an undue hardship on the debtor and the debtor’s dependents. We are required to file a lawsuit (called an adversary proceeding) in the Chapter 7 Case against the student loan lender. We must then prove to the court’s satisfaction that:
- prior to bankruptcy you made a good faith effort to repay the student loans
- you will not be able to maintain a minimal standard of living if forced to repay these loans
- and that this situation is likely to continue for a significant period of time.
Student Loans In Chapter 13
A Chapter 13 bankruptcy can give you some relief. First, once this bankruptcy is filed the automatic stay prevents all student loan lenders from filing lawsuits against you, or continuing any previously filed lawsuits. Then, during the Chapter 13 Case, you are not required to make the loan payment. The student loan lender (like the credit cards) will receive a (usually small) monthly dividend based upon your ability to pay. Since the Chapter 13 case will last 3 to 5 years, your debt load will be significantly reduced during this time. However, unlike credit cards, you can not cancel the unpaid portion of the student loan, and you will still owe the balance when the bankruptcy is concluded. Hopefully, the cancellation of the non-student loan debt in the Chapter 13 Case will enable you to resume the student loan payments.
Contact Todd to discuss your student loan debt!