Student Loans and Bankruptcy

For many individuals with mounting debt, unfortunately the best way to get out of the red is to declare personal bankruptcy. But does this strategy actually offer relief from your student loan debt?

The average college student loan debt is over $19,000.

Fixed cost payments usually consist of mortgage, car, insurance, utilities, and in this case student loan payments. Then there’s also the added burden of about $10,000 in credit card debt—on average—per American household.

Add all of these financial debts together and given the right combination of debt load in contrast to income it’s not hard to imagine exactly how your financial situation could be pushed over the edge, into bankruptcy territory.

Forgiveness of Student Loans after Bankruptcy

It would be nice to just wipe the slate clean concerning all of your debt, including student loans, wouldn’t it?

The truth is, declaring bankruptcy is not a solution to paying off your student loans. Why? In only rare circumstances are student loan debts cancelled, or discharged, due to bankruptcy. A bankruptcy court must decide that your financial situation would bring about undue hardship if you were to continue to be held responsible for your student loans. Guess what? This is not a common ruling. In order for this to happen you’d likely have to prove a long-term physical disability that would exclude you from being able to ever find full-time work.

Why Your Student Loans are Rarely Cancelled

Student Loans are rarely forgiven since they are guaranteed government funds dispersed with low interest to all kinds of people with no credit history. You don't expect the IRS to forgive you on all taxes that are owed, so expect the same treatment with your student loan.

Most student loan debt is secured debt borrowed from the federal government that cannot be erased. Unsecured student loan debt from private and non-profit organizations is also not erased by bankruptcy.

**Is there is a difference between filing a Chapter 13 and Chapter 7 bankruptcy when it comes to trying to get your student loans discharged? No. Doesn’t matter which type of bankruptcy for which you file, your student loan debt is likely to remain intact.

How to Get Your Student Loans Paid Off During Bankruptcy

There is one way you may be able to take care of your student loan debt. In some cases a bankruptcy court may decide to discharge your unsecured debt in order to get your student loans paid off, first.

How this works:

Student Loan debt is often put into a separate category by the bankruptcy court to give it priority. Debt that receives the lowest priority in payback is usually credit card debt. For example, the court may decide, in a Chapter 13 bankruptcy, which is a reorganization of your debt, to allocate most of your monthly payments to your student loans and away from unsecured debt such as credit card debt.

Alternatives to Bankruptcy

Remember, declaring bankruptcy is a serious financial decision. If you are having problems principally with student loan repayment you should first contact your lender. Explore other options, first, such as student loan forbearance, loan deferment, and loan consolidation programs that are designed specifically for borrowers with student loan repayment problems. But make sure you manage repayment problems before you default on a loan; at that point your financial problems will be compounded.