Student loans are tough. They can follow you for a long time after graduation and can be hard to manage with other debts you take on. Generally, you can't get rid of student loan debt in bankruptcy. This is non-dischargeable debt, which means it remains after bankruptcy and you must pay it.

However, there is one exception you should know about. Some student loans may be considered an undue hardship, and can be discharged, or eliminated, if the loan payments put an extreme burden on you or your family.

Show Your Hardship to the Bankruptcy Court 

The first step in qualifying for undue hardship is to file a separate motion with the court and then meet with the judge to explain your hardship. This isn't easy to do. You have to show three things to prove undue hardship:

• That in your current situation, you can't maintain a minimum standard of living and repay your loans
• Your bad financial situation is likely to continue
• You made honest efforts to pay off the loans

It's almost impossible to show undue hardship unless you're physically unable to work and your situation isn't likely to improve in the future. So, if your student loans make up most of your debt, it probably isn't wise to attempt this unless you're disabled.

In the past, some privately funded student loans could be discharged in a Chapter 7 bankruptcy. However, the law changed with the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. Now, any education loan that qualifies for a tax deduction is non-dischargeable, unless you show "undue hardship."  

Loan Consolidation and Chapter 13 Cases

Consolidating your student loans with other debts in a Chapter 13 case may be an option if you can't show undue hardship. In Chapter 13, you work out a plan to repay your debts over three to five years. Collection actions against you stop and it might lower your monthly payments.

For a Chapter 13 bankruptcy, you need a stable income with disposable income. Disposable income means money left over after paying for food, housing and other basic needs. Also, you can't have more than $1,081,400 in secured debt (debt involving property that your creditor might take if you don't make your payments) and $360,475 in unsecured debt. These amounts sometimes change to reflect updates in the Consumer Price Index. 

If you include your student loans in a Chapter 13 repayment plan, you might be able to make a dent in the loan balance over the life of your plan. However, you will still owe whatever student loan debt remains when your plan is complete.

Challenging the Loan Balance

Sometimes it isn't clear what your exact loan balance is, or whether charges on your account are correct. Errors can happen when student loans are transferred or sold to different lenders over the years.

In a Chapter 13 case, you can use an objection against the lender's student loan claim to get the court to determine your rights. Once a judge decides on the correct amount you owe, it is binding on the lender even if the repayment period on the loan stretches beyond the end of the bankruptcy plan.

Next: Collection methods for student loans and repayment options

 

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