Bankruptcy and Student Loans
Generally speaking, student loans are non-dischargeable debts that cannot be eliminated in a bankruptcy. Prior to the bankruptcy law change in 2005, student loans owed to private non-profit institutions were dischargeable, but the new bankruptcy laws closed that exception. Currently, the only way to eliminate student loans in a bankruptcy is to file an adversary with the bankruptcy court and demonstrate that the student loans impose an "undue hardship" on you or your dependents.
The "Undue Hardship" Exception
Bankruptcy judges have interpreted the "undue hardship" exception very favorably towards student loan lenders, and disability or other extreme circumstances are typically required to successfully eliminate student loans. A majority of jurisdictions require you to demonstrate that:
- Repayment of the student loan would prevent you from maintaining an adequate standard of living,
- Your financial situation is unlikely to improve, and
- You have made a good faith effort to repay the student loan.
Adversary proceedings to determine the dischargeability of student loans can resemble a "mini-trial" and can be very time-consuming and complex. Accordingly, legal fees can be substantial and difficult to afford, especially for someone facing "undue hardship".
Chapter 13 and Student Loans
Student Loans can be included in the 3-5 year repayment plan of your Chapter 13 bankruptcy, but you will be responsible for any remaining balance upon the completion of your bankruptcy. Anywhere from 10% to 100% of your student loan may be included in your bankruptcy, depending on your assets, debts, and income.
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Including your student loans in a Chapter 13 bankruptcy offers many protections and can provide you with short-term relief from collection activity. While you are in a Chapter 13 bankruptcy, the student loan creditors are prohibited from adding any interest or penalties to your pre-petition debt and cannot garnish your wages or place liens on your property. You can also request that the bankruptcy court make a final determination on the proper amount owed if there is a dispute as to the correct balance of the student loan.
Student Loan Eligibility after Bankruptcy
Generally speaking, a bankruptcy filing will not affect your eligibility for federal student loans. These government loans are based on need, not credit, and federal lenders are prohibited from denying a student loan solely based on your bankruptcy determination. However, federal lenders are allowed to consider your credit history since the bankruptcy when determining your willingness to repay the loan. They may also deny a request for further loans if your student loan is in default and not included in a repayment plan.
Private student loan lenders may consider a previous bankruptcy filing when determining eligibility. Maintaining good credit after bankruptcy, repaying old student loans, and demonstrating a steady income are all factors that could influence a private lender to grant you a student loan even after a bankruptcy. A parent's bankruptcy filing does not affect their children's eligibility for a student loan, unless they are required as a cosigner on the loan.