What do you do if you have $80,000 in student loans and after a period of years are simply unable to pay them off? What many former students do is to file for Chapter 7 bankruptcy and try to have the debt wiped out.
But is this really a successful strategy? It used to be that if a bankruptcy judge approved your filing for Chapter 7, that the majority of your debts, including student loans, would be liquidated. You would still be responsible for debts such as taxes, child support, and a few others. But, for the most part, you would be able to reset your financial life.
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Under recently passed laws, however, except in rare circumstances, student loans are usually no longer liquidated when you file. For most people, this makes filing for Chapter 7 much less advantageous than it was in the past.
So what are the rare circumstances in which a judge will allow you to dispose of your student loan debts? The best case you have is to file for a student loan hardship. What this means is that you have to prove to the courts that if you are forced to repay your loan, it will cause undue hardships for you and your dependents. And you have to prove this by filing a separate court action as part of your bankruptcy case.
The legal standard that you have to meet is pretty tough. Most judges will not discharge your student loan unless you can make the case that you will never be able to repay the loan. In addition, to prove that you have been acting in good faith, you must show that you have exhausted all reasonable attempts to pay back the monies that you have owed.
The court test that you must meet in order to show undue hardship is state based. As a result, what may be considered a hardship in one state, may not be considered a hardship in another state. To determine the probable outcome of a bankruptcy filing, its best to seek the expert advice of a bankruptcy attorney in the state in which you are filing.
What will actually happen in most cases is that you will be advised to file a Chapter 13 bankruptcy instead. This is what is typically referred to as a repayment plan. Under this plan, your student loan debts will not be liquidated.
However, the terms under which you are currently paying them will most likely be modified. The effect of this will be to either change the amount of the loan that you will have to repay each month, to adjust the interest rate, or possibly both.
But, if you are lucky, the court will approve your hardship filing. In this case, your student loans will be wiped out.
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