Clearing Up Misconceptions About Student Debt and Bankruptcy

Do you have outstanding debt from your student loans? If so, you're not alone. In fact, the average college graduate in 2016 carried more than $37,000 in student loan debt. And while many lenders are willing to work with recent graduates by offering flexible repayment plans, the fact is that many graduates these days are finding that they simply cannot afford to pay back the money they borrowed while in school. Combine this with other debts from things like credit cards, cars, and homes—and it's easy to see why filing for bankruptcy is sometimes the only option.

What Happens to Student Loan Debt in Bankruptcy?

One of the most common misconceptions people have about student loan debt is that it cannot be legally discharged in bankruptcy. As a result, many people who could truly benefit from filing for bankruptcy end up forgoing this option because they don't realize how much it could help them.

Laws regarding student loans and bankruptcy are pretty complex and have changed a lot over the years, which has probably contributed to some of the confusion and misconception that exists today. In the past, laws dictated that student loan debt was not eligible for discharge through bankruptcy for anywhere from five to seven years. By 1998, these regulations had been changed yet again to prevent student loan debt from being discharged at all, except in cases of proven hardship.

Proving Undue Hardship

Today, the law remains that student loan debt can be discharged, but only in cases where the person filing for bankruptcy can prove undue hardship.

Exactly what does this mean? Specific criteria must be met to prove this hardship, including:

• The borrower must have made an effort to pay the student loan balance.
• The borrower will be unable to maintain a minimal standard of living while paying the loan balance.
• Difficulty in repaying loans will persist for the foreseeable future.

If all of these criteria apply to you, then you may actually be able to have some or all of your student loan debt discharged through bankruptcy. Unfortunately, being able to prove this hardship isn't always easy; it will be important to establish that all of this criteria applies to you and will continue to apply to you down the road.

Next Steps to Consider

If you're facing hardship while trying to repay your student loans and are wondering if you could have some or all of your balance discharged by filing for bankruptcy, there are a few steps you'll want to take. Begin by making sure you have records of all your student loan debt that may be eligible for discharge. This will include loans that were used for tuition, books, and related enrollment costs (such as registration fees).

From there, it is recommended that you consult with an experienced bankruptcy attorney, who will be able to assess your current debts and determine whether or not bankruptcy is truly the best option for you. He or she will also be able to determine what form of bankruptcy will make the most financial sense for you to file, and will give you an idea of how much of your student loans may be eligible for discharge.

Facing insurmountable debt is something nobody wants to go through, yet with high costs of enrollment at most colleges and universities these days, it can seem impossible to get a degree without incurring large amounts of debt. The good news is that bankruptcy may be able to help you get some or all of your student loans discharged under specific circumstances.