How to Discharge Student Loans via Bankruptcy

Many, if not most, college students take out loans to finance their education. This is a stark reality particularly as the price of college education continues to rise.

The Consumer Financial Protection Bureau revealed that more than 41 million Americans are now facing federal student loan debt. On the average, each owes the government almost $30,000 in student loan debt and one in four borrowers are either in default or behind their payments.

Unfortunately, not all student-borrowers are able to settle their payments by the time they graduate. Many still have to deal with repaying their loans even after college. Some have even resorted to filing bankruptcy just so they could discharge of their student loans.

Discharging student loans, however, is not encouraged by U.S. Congress believing that educated workers command higher salaries and can become more competitive in the global economy. The process has been made more difficult and requires students to repay their loans even if they don’t complete their education or could not get employed in their specific area of study. In fact, student loan discharge via bankruptcy has more restrictions than discharging other forms of debt.

Steps to Discharge a Student Loan

Today, there are only a few circumstances that a student can have his federal loan discharged. And he or she needs to prove to the bankruptcy court his financial hardship in settling the loan.

To determine the level of hardship, the court uses three criteria. The first is the student will not be able to maintain a minimal standard of living if forced to continue paying the loan. Secondly, there should be evidence that the financial difficulty will continue during the loan repayment period and third, the borrower has made an effort to repay the loan usually for a minimum of five years before filing bankruptcy.

In the event that any of these requirements are found not true, the loan will not be discharged. If the loan is discharged, the borrower will not have to repay any longer as the collection will be stopped.

Students who are firm in filing for bankruptcy can choose between Chapter 7 and Chapter 13 bankruptcy. A major requirement under Chapter 7 is to prove that the borrower has no steady income to pay his debts. It should be understood, though that your loan debt will not be totally eliminated as you will still have to pay at the terms you can afford.

Chapter 13, on the other hand, is suited for debtors who have income and who can still afford to pay part of their debts. This also includes a restructure scheme in the repayment of debts with your monthly payments having a chance to be reduced. You’re not off the hook, though, even after your bankruptcy repayment period ends.

Do take note that although these two options can eliminate your debt including medical or credit card bills, the borrower may still have to give up some of his property to repay part of his debt. Normally, the process of loan discharge through bankruptcy takes four to six months.