It’s a common misconception that you cannot discharge student loan debt through the bankruptcy process. It is, however, very difficult. You must show that paying back the student loan will impose an “undue hardship” on you financially.
If you have a federal student loan, either one directly from the government or backed by the government, it is rare to have it discharged as part of the bankruptcy process. There is a a three-part test to determine if you are eligible and you must meet all three parts to be considered.
First off, you have to have made a good-faith effort to pay off your loans. To meet this criteria, a bankruptcy court will usually require that you’ve been making payments on the loans for at least five years and possibly even longer.
The second criteria that you have to meet is that continuing to make your loan payments will not allow you to maintain a minimal standard of living. This essentially means that your income is so low that you cannot afford to pay for basic necessities such as rent, food and utilities in addition to your student loan payments.
The third requirement relates to the second one. Your inability to maintain a minimal standard of living must be expected to continue for a significant portion of your loan repayment period.
Courts have a lot of discretion in deciding whether you meet these three criteria. For example, one bankruptcy judge might consider the fact that you have a low-paying job enough evidence that you can`t make your loan payments. Another judge, however, might determine that your education and experience mean you could get a higher-paying job.
If you fail to meet any of the criteria, you cannot discharge your student loans through the bankruptcy process, but that doesn’t necessarily mean that bankruptcy can`t be a good tool for managing your student loans.
Even if your student loans aren’t discharged in bankruptcy, your other debts likely will be if you qualify. This can make it much easier to make your student loan payments.
If you are approved for Chapter 13 bankruptcy, which doesn’t wipe out your debts, but rather reorganizes your debts into a more manageable payment structure, you may get your student loan payments reduced or your term extended. This may allow you a better chance to be able to pay your loan back.
If you are struggling with paying back your student loans and bankruptcy isn`t an option, there are other ways to try to ease the burden.
One option is to consolidate your student loans with other debt. For instance, if you own your own home and have equity in in, you might be able to do a cash-out refinance and use the money to pay off your student loans. You would essentially be trading more mortgage debt for your student loan, but mortgages usually have lower interest rates and a much longer pay-off period.
You might also try to consolidate or do debt settlement on other types of debt. For example, moving all your credit card balances to a lower-rate card can lower payments there and give you more breathing room to pay your student loans.
You might also see if you qualify for any student loan forgiveness or cancellation programs.
If you have been certified as permanently disabled, the government will cancel the remaining balance on your student loan.
You also can get your loan balance canceled if your school closed while you were enrolled or within 90 days after you graduated, or if it committed fraud by either certifying you to receive a loan when you weren’t eligible or failing to refund your loan balance to the federal government after you dropped out of school.
There are also programs that forgive part of your loan if you work in certain jobs.
For example, if you have worked full-time as a teacher for at least five years in a low-income school, you may qualify to have up to $17,500 of your student loans forgiven. You can also qualify for loan forgiveness if you work in certain public service jobs and have made at least 120 payments on your loan.
Whatever route you wind up taking to deal with the burden of your student loans, if it involves bankruptcy, you can get advice from Bankruptcy Advice Service. More details about the Student Loan Bankruptcy Exception are here.