It’s one of the most commonly asked student loan questions: Can you discharge your student loans in bankruptcy? The short answer: normally no, student loans are not dischargeable. Student loans are now the second highest consumer debt category – behind mortgages, but ahead of credit card debt. Unlike other consumer debt such as credit card and mortgage debt, however, student loans traditionally cannot be discharged in bankruptcy.
The rationale for the student loan “no bankruptcy” exception likely grew from a concern that student loan borrowers could take advantage of bankruptcy laws, borrow a bunch of debt, earn a degree and then file for bankruptcy. In some circumstances, student loans can be discharged, but you have to file a separate lawsuit. This lawsuit must be filed with the bankruptcy court. To be successful at discharging your student loans, you must prove to a judge that being forced to repay your student loans poses what the U.S. Bankruptcy Code calls an “undue hardship.”
The courts of the Eighth Circuit (the circuit Arkansas is in), look at the debtor’s individual circumstances (they call it a totality of the circumstances test) to determine whether excluding student loans from discharge would impose an undue hardship on the debtor. The test includes: “(1) the debtor’s past, present, and reasonably reliable future financial resources; (2) the debtor’s reasonable and necessary living expenses; and (3) any other relevant facts and circumstances.”
When dealing with student loans and bankruptcy there are a couple of things to think about. In Chapter 7, they will not likely get discharged and dealing with your student loans will remain the same. In Chapter 13, you may be able to file and make the majority of your payment go to student loans while your other creditors (maybe credit card and medical bills, do not get paid as much). Also, you may file be able to file Chapter 13 and pay your other creditors (house and car) and push your student loans for another 5 years.
Your best option is probably one of the following income-based repayment options:
Sometimes you can get a payment of $0.00 per month in an income-based repayment program.
Some debts are never discharged in bankruptcy. Some are not discharged unless you can successfully argue that they should be. Some are not discharged if a creditor successfully argues that they should not be.
You will continue to owe these debts after your bankruptcy case is over:
If you file under Chapter 7, you will also continue to owe condo, co-op, and HOA fees; debts for loans from a retirement plan; and debts you couldn’t discharge under a previous bankruptcy.
Certain debts will be discharged only if you ask the court to rule that it should be. In other words, the default is that these debts are not discharged unless you convince the court otherwise. These are:
Some debts are discharged unless a creditor comes forward and convinces the court that they should not be. These debts include:
If this is a little confusing, feel free to call, 501.372.1212, or set up a free consultation by clicking here.