Can You File Bankruptcy on Student Loans?

The Short Answer is no.  However, there is a way to file Bankruptcy on Student loans if the debtor meets a variety of factors.

 Student loan debt has become a bigger problem for Americans than credit card debt.  According to an article in The Wall Street Journal, the graduating class of 2014 has the most student loan debt than any other graduating class before them.  Students in 2014 are graduating with an average of $33,000 in student loans; however, for some students, that debt is much higher.  For college graduates trying to enter the work force, student loan payments can be extremely difficult. 

 Many students defer their student loan payments, make interest only payments, or arrange to make minimal payments toward their student loans.  Unfortunately, the balance on those student loans continues to grow with interest and fees making it almost impossible to pay off student loans within a reasonable time.  If you are one of the millions of Americans struggling to pay student loans, you may be wondering if filing bankruptcy will help.

 Bankruptcy and Student Loans

 Americans owe $1.2 trillion in student loans. This exceeds the amount of credit card debt owed in this country. Federal student loans are typically not dischargeable in bankruptcy. In some cases, a debtor may be eligible to discharge federal student loans in a Chapter 7 bankruptcy if he or she meets the following requirements.

1. The debtor must prove to the court that if the debtor is required to repay the student loans, the debtor will be unable to provide a minimal standard of living for the debtor and the debtor’s family.

2. The debtor must prove to the court that the debtor’s current income will not change during a significant portion of the repayment period for the student loans (i.e. the debtor is disabled and is not able to return to work).

3. The debtor must have made a “good faith” effort to repay the student loan. There is not a specific definition of “good faith” but some bankruptcy judges have defined good faith as making payments on the student loans for at least five years prior to filing bankruptcy.

Filing Bankruptcy with Student Loans

Even though very few debtors meet the above requirements for discharging federal student loans through a bankruptcy, filing bankruptcy can still help a debtor with his or her student loans.  By filing a Chapter 7 bankruptcy case, the debtor discharges most, if not all, unsecured debt including personal loans, medical bills, credit card debt, and payday loans.  In many cases, by eliminating other unsecured debts, the debtor is in a better position to pay his or her student loans.

 If the debtor files a Chapter 13 bankruptcy case, the student loan payments will be deferred during the term of the bankruptcy plan.  The student loan company receives the same percentage of payment as other unsecured creditors through the debtor’s Chapter 13 plan.  The debtor can voluntarily choose to make payments on the student loans during the bankruptcy or the debtor can wait until he or she completes the bankruptcy plan to resume the student loan payments.  In either case, the bankruptcy filing provides the relief that the debtor needs to become financially stronger so that he or she can afford to resume making the student loan payments.