What Happens to Student Loans in a Personal Bankruptcy?

Students often take out loans feeling certain that they’ll get a job that enables them to repay in full right after graduating. But new graduates are encountering difficulty finding a good job. When their student loans come up for repayment, this lack of a good job can present a problem.

Your repayment obligation for student loans typically begins six to nine months after you graduate or withdraw from school. Many loan holders find the repayment plan unmanageable, and let their loans fall into delinquency. And after just nine months of missed payments, your lender can request full repayment of the loan at once. Normally, filing bankruptcy can erase delinquent loans, but student loans are almost always non-dischargeable, meaning that you still have to make regular payments on the full amount.

Dischargeable student loans

There is one exception, however. The law allows for student loans to be discharged in bankruptcy in certain circumstances of financial distress. If you can prove to the bankruptcy court that even without student loan payments, your income isn’t enough to cover more than the bare essentials of living, that making student loan payments would therefore cause you undue financial hardship and that your financial state isn’t likely to improve, you will be allowed to eliminate your student loan debt in bankruptcy.

Filing for a hardship discharge takes extra steps, however. To request a discharge, your attorney has to file a special adversary proceeding petition, which appeals to the court to make an exception to the non-dischargeable rule in your case.

You also have the option of filing for Chapter 13 bankruptcy, instead of for Chapter 7. With Chapter 13, you make a payment agreement to finish repaying your debts with reduced payments, under the supervision of the court, over a period of three to five years. Every month you turn your extra income over to your bankruptcy trustees, who distribute it to your creditors in payment.

After your Chapter 13 payment plan ends, your debts will be eliminated, except for student loans. But during that period, your lender may not call your whole student loan due at once, easing your burden.

To find out more about how to manage student loan debt in bankruptcy cases, consult a bankruptcy or debt relief attorney in Pennsylvania right away. 

By Harold Shepley | Published January 6, 2015 | Posted in Bankruptcy, Debt, Financial Distress | Tagged bankruptcy discharge, Dischargeable student loans, payments on student loans | Leave a comment