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 Student Loans and Bankruptcy

Bankruptcy Lawyers Arlington, TX

One of the purposes of filing bankruptcy is to allow debtors a fresh start by discharging debt that they are unable to pay.  Bankruptcy is intended to give people that have made some bad decisions, or faced situations that were out of their control, like getting sick, a second chance.  If a person incurred massive credit card debt because of a gambling habit, or started a business that failed, those debts would be discharged in bankruptcy.  This is not necessarily true for student loans, though.  Although student loans can be discharged in bankruptcy, it can be extremely difficult and may require additional procedures outside of the normal bankruptcy which are not covered in most attorneys’ fee agreements.

Before 1976, all student loans were dischargeable in bankruptcy.  In 1976, Congress enacted laws that made loans from non-profit educational institutes non-dischargeable in the first five years of repayment.  In 1984, the bankruptcy laws were amended again to make all private student loans non-dischargeable during the first five years of repayment.  The 2005 Bankruptcy Abuse Prevention and Consumer Protection Act provided that no student loan, either private or federally-funded, could be discharged without showing an undue hardship.

“Undue Hardship” is a very high standard.  Determining undue hardship is a three part test.  First, the debtor must not be able to maintain, based on current income and expenses, a minimal standard of living for them and their dependents if forced to repay the loans.  Second, additional circumstances exist indicating that their circumstances are likely to persist for a significant portion of the repayment period.  Finally, the debtor has to have made a good faith effort to repay the loans.  Studies have shown that of all of the bankruptcies filed in the United States in a given year whose debtors have incurred student loan debt, only about ten percent of those bankruptcies involve proceedings to determine dischargeability of student loans.  Of those cases, only about half are successful at discharging at least a portion of the student loan debt. Attempting to have student loans discharged can be a long and costly undertaking, and there is no guarantee at the end of the road that the student loans will be discharged.

While student loans are not normally dischargeable, a debtor does have some options.  Student loans can be paid through a Chapter 13 bankruptcy, and the payments could potentially be lower than the payments required by the loan outside of bankruptcy.  After the chapter 13 bankruptcy is discharged, the remainder of any student loan debt will not be discharged.  At that point, the debtor could potentially be able to afford the payments on the student loans because their other debt would be discharged.  If the debtor still can’t afford the payments, the debtor can file another chapter 13 bankruptcy, though if the subsequent chapter 13 is within 4 years of the discharge of the previous chapter 13, the debtor will not receive a discharge.  While this is obviously not the optimal route to go, it is certainly an option if the only other choice is to default on the student loans.

If you have questions regarding student loans and bankruptcy, you need to contact the Arlington, Texas lawyers of the Brandy Austin Law Firm.  We have the knowledge and experience to guide you through these tough decisions.  The worst decision you can make is to do nothing.  Let us help you come up with a game plan to help you through your financial difficulties.