Recently on our legal forum a user asked, “I am one of the thousands of students who has accumulated student loan debt. I should have listened to my parents and gotten a degree that was marketable but instead my liberal arts degree has left me with nothing but debt and a job as a barista in a local coffee shop unable to repay my student loan. I am wondering if filing bankruptcy and discharging my student loan debt is possible and what I need to know?”
Student loan debt soars in America
Not everyone is talking about it, but most financial experts predict that the next big bubble that is likely to burst is student loan debt, which now tops more than $1 trillion dollars in outstanding debt in the U.S. In fact, the debts have grown so large that many Americans struggle more to repay their student loans than their credit card debts or other bills.
What do I need to know about discharging student loan debt?
So, what do you need to know about discharging student loan debts? Let’s take a look at the top issues you will face discharging your student loan debt.
- Student debt is not automatically discharged in bankruptcy.
Although it is not impossible to discharge student debt, it will not be as simple as filing a case. This might seem strange since other unsecured debts (i.e. credit card debts, medical debts, and unsecured personal loans) are generally discharged. Unfortunately, bankruptcy laws have been updated and have made it much more likely to discharge student loan debts.
- You must file a motion to have your student loan considered for discharge.
Next, before your student loan debt will be discharged you will have to file a motion and argue your case before the bankruptcy judge. The court has very strict criteria to make their discharge decisions, which is much different than the presumptive discharge for other unsecured debts.
- Chapter 13 bankruptcy will not discharge unpaid student debt.
Another consideration if you decide to file Chapter 13 bankruptcy is that the student loan debt will not be discharged at the completion of your Chapter 13 debt repayment plan. For example, other unsecured debts which are included in your plan will allow you to repay a small percentage of the debt over a 3 or 5 year period, with the remaining debt discharged at the end of the repayment plan. Student debts will remain (and may even have accrued interest) even if you made payments for the duration.
Discharging student debts may be discharge with bankruptcy but you will have to first file a motion for discharge, prove that paying your debt will cause undue hardship. This includes proving that you will not be able to “maintain a minimal standard of living,” your financial situation is likely to continue for the “foreseeable future” and that you have made a “good faith effort to repay the loan.” While good faith has not been codified it could require previous payments for as long as five years.