subject: Bankruptcy and Student Loans Don't Mix- Part 1 [print this page] Bankruptcy and Student Loans Don't Mix- Part 1
Recent federal court decisions have made it easier for those filing for bankruptcy to have their student loans discharged. It also leaves them eligible for some future federal student loans. But it's not as simple as it sounds. Bankruptcy and student loans don't mix so well when you look at non-federal funded loan types.
In the US, the Bankruptcy Code details what a person who is filing for bankruptcy can expect when it comes to student loans. It can be a bit complicated, but a bankruptcy lawyer can get into the specifics of a particular case. In general, the following are true:
Federal-funded or guaranteed loans. The Code specifically mentions student loans funded or governed in whole or in part by the federal government as may not be discharged except in cases where it poses undue hardship on the debtor or his dependents.
Privately-funded student loans. Education loans granted by private nonprofit organizations are typically nondischargeable under bankruptcy law. In some instances, a case can be made for discharge if the debtor can prove that repayment of the loan imposes undue hardship. The debtor must file a petition and provide proof of this.
In both cases, undue hardship can alleviate some of the burden of a student loan, but not necessarily in its entirety. Undue hardship, for the purpose of bankruptcy and in relation to student loans, must meet the following criteria:
Inability to maintain a minimal standard of living. The meaning of "minimal" is highly subjective and must be determined on a case to case basis by the courts.
Persistence of financial distress. The debtor is unable to obtain or sustain employment due to illness, injury or other circumstances in the extended, foreseeable future.
Evidence of good faith. The debtor has shown in the past a willingness to pay off the loan when income was good, and has only become delinquent because of present circumstances. The debtor must also show that all effort, including increasing income and cutting down expenses, has already been made and failed.
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