Student Loans & Bankruptcy: Discharging Your Student Loans

You may have the option to argue for a discharge of your student loans in bankruptcy. It is important to understand that debts are very rarely discharged in full when you file. You will have an opportunity to ask for a discharge only if you are filing for a Chapter 7 liquidation; individuals filing Chapter 13 restructuring cases will not be able to discharge debts. If you are filing for Chapter 7 and feel you cannot afford to repay your student loans and provide for a reasonable standard of living, you may be able to discharge the debts if it would place undue hardship upon you to repay them.

Prioritization of Debts

The first thing a judge will do in your bankruptcy case is review the priority level of your debts. You do not personally choose these priorities. There is legal grounds to list certain debts as more important than others. For example, debts to the federal government, including student loans, are always listed as high priority debts. Real estate loans with collateral, like mortgages, are also senior debts. Unsecured loans, like credit cards and personal loans, are last in line. It is more likely for a judge to discharge one of these low-priority debts than student loan debt.

Liquidation of Assets

Once your debts have been organized, a judge will determine your ability to repay the sums. The judge will consider not only your income and liquid cash; he or she will also consider the assets you have available for liquidation. Real estate, automobiles and other assets will be turned over. Typically, they will be offered as resolution of any loans against them. Other assets, such as stocks and savings, will also be liquidated to meet the payments of further debts. Finally, income and wages can be garnished to begin repaying further loans.

Discharge of Remaining Debts

If your assets have been liquidated, you will be able to maintain a level of income that will allow you to find a place to live and adequate transportation. A judge will never liquidate your assets to a point where you can no longer afford a base quality of life. This would be considered "undue hardship" for you. The judge and the court system want to protect you as well as your creditors. Therefore, you will be ordered to repay debts only to a level that does not place this undue hardship upon you.

Proving Hardship

If you feel repayment of your student debts will cause undue hardship to you, you will carry the burden of proof. Prove this by showing your income, base monthly expenses and the cost of living in your geographical location. If repaying your loans would not be possible or practical at your current income level, a judge may discharge the debt. Since wage garnishment is an option, a judge is more likely to enforce a small amount of payment each month for many years than to entirely discharge the debt, particularly if it is a government loan. You may be able to eliminate your interest payments on the loan, however, much more easily. 

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