Student loans are unique, but not in a good way. It is one of the very few debts that you can probably never discharge in bankruptcy.
Unless you can satisfy the very rigorous “undue hardship” test, you are likely stuck with your student loan. Even if you can discharge all other debts, student loans could be the one debt that survives a bankruptcy filing. Even money owed to the IRS is less sticky than student loans.
The Undue Hardship Test:
If you’re considering trying to satisfy the Undue Hardship Test, mentioned above, you’ll need to satisfy ALL of the following criteria:
- Based on your current income and expenses, are you and your family unable to maintain a “minimal” standard of living, if required to repay the student loan?
- Do circumstances exist which indicate that this current situation is likely to persist for a significant portion of the period over which you are required to repay the student loans? . . and
- Have you have made a good faith effort to repay the loans.
Individuals seeking to discharge student loans have found it exceedingly difficult to satisfy all parts of this test. Student borrowers also generally encounter stiff opposition from the Department of Education attorneys.
Best Strategy For Student Loans
Just because a debt is non-dischargeable doesn’t mean there’s no way to deal with it. Often student loan debt is just one of numerous debts. Some of those other debts may well be dischargeable (in full, or in part) in bankruptcy. This means bankruptcy, and bankruptcy planning can be very helpful.
Before Filing Bankruptcy: Many debtors make payments on credit cards or other personal loans, but let student loans go unpaid – sometimes for years. Even if in forbearance, a student loan keeps accruing interest. That means the balance is going to keep growing, and growing. But if student loans are the only debt that can’t be discharged in bankruptcy, was it smart to prioritize other debts over this one? No, almost certainly not. The earlier an individual seeks advice, the more likely he or she can avoid such painful mistakes.
After Filing Bankruptcy: Bankruptcy also often has other benefits with regards to student loans. In a chapter 7, the individual may wipe out all other debts, leaving the individual better positioned to actually pay down the student loan. In a chapter 13 (called a “reorganization”), an individual can also often make smaller, more reasonable payments on the student loan. After a period of time, the student loan debt may be the only obligation remaining – again, making it easier for the individual to pay off this debt.
Check back soon for another post related to guaranteeing a child’s student loan.
We are also working on a two-part series to help potential students evaluate the costs and benefits of taking out student loan debts. Stay tuned.