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Student Loans and Bankruptcy: What You Need to Know

Calculating student loans
  • Blog
  • Jill
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  • August 20, 2020

Student Loans and Bankruptcy: What You Need to Know

As college tuition has gone up, student loans have become more popular.  Nearly 70 percent of students borrow money in order to get their degree.  Sometimes this works out, but other times it does not.  Paying off student loans takes a lot of time and money, and it can be extra stressful if you are facing financial trouble in other areas as well.  If you are close to bankruptcy, here is what you need to know about student loans.

What is bankruptcy?

Bankruptcy is a legal process where a person in massive debt gets relief for part or all of the money.  A bankruptcy lawyer can help you if you are considering filing.  There are many different types of bankruptcy, but the two most common are chapter 7 and chapter 13. 

Chapter 7 bankruptcy is referred to as liquidation.  This is when almost all of an individual’s or business’s unsecured debt is erased and assets are sold to cover the cost of secured debt.  You have to be below a certain income level to file for this type of bankruptcy. 

Chapter 13 bankruptcy is only for individuals, not businesses, and is also called reorganization.  There is no income requirement, but debt has to be at a certain amount.  Instead of canceling debt, chapter 13 reorganizes it into a more manageable repayment plan.  Assets do not have to be sold, and foreclosure can be prevented.  Talk to a bankruptcy attorney about what type of filling is best for your situation.

Can student loans be forgiven if I file for bankruptcy?

Technically, the answer is no.  It is very difficult to get student loans erased even if you go bankrupt, but it can be done through an additional lawsuit.  Chapter 7 bankruptcy states that there are a few unsecured debts than are usually not erased.  These are government taxes, student loans, child support, and alimony.  Debt is only reorganized in chapter 13 bankruptcy, not canceled, so you would still have to pay them off eventually.

Your best bet for student loans when it comes to bankruptcy lies with something called the Brunner Test.  This is a series of three questions that show whether repaying them would put you and your family in under “undue hardship.”  The test asks

  1.   Can the debtor maintain a minimal standard of living for themselves if they have to repay the student loans?
  2.   Will this problem continue for much or all of the repayment period?
  3.   Did the debtor make a solid effort to repay the student loans in the past?

If the court decides that someone can’t maintain a basic standard of living, will have this issue for a while, and tried to pay them off to the best of their ability, the student loans can be forgiven.  This is decided separately from the rest of the bankruptcy case.

Be warned that this is not a decision that courts make lightly.  It is very difficult to prove that you need your student loans completely canceled, even when bankrupt.  You need a very good bankruptcy attorney in order to have a chance for this outcome.

Looking for a bankruptcy lawyer?

If you need help erasing student loans or other debt, consider Bartifay Law Offices.  They have been working as foreclosure and bankruptcy attorneys since 1993.  Bartifay Law strives to be fair to their clients and not put them into additional debt by charging exorbitant fees.  Call (412) 824-4011 to schedule a free consultation at one of their eight locations in the greater Pittsburgh area. 

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