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Student Loans Bankruptcy - Filing Bankruptcy with Student Loans - Student Loans Bankruptcy Exception, Student Loans Bankruptcy Consolidation

undue hardship situation repay

Many present and former students who are having financial difficulties ask if they can discharge their student loans by filing for bankruptcy. The quick answer to this question is no, it is generally not possible to eliminate student loans through bankruptcy. Student loans are considered to be a non-dischargeable debt, so when bankruptcy is filed, the debt remains intact, and you are still responsible for paying back the loans. That being said, there are some exceptions to the rule.

Student Loans Bankruptcy Exception

There is one exception that allows student loans to be discharged through filing Chapter 7 bankruptcy – the undue hardship exception. If you can prove that paying back the student loans will create an undue hardship for you and your family, a judge can order that the student loans be included in the bankruptcy.

In order to claim undue hardship, you must file a motion with the bankruptcy court separate from the actual bankruptcy filing. After the undue hardship motion is filed, the court will set a date for you to appear before the judge to personally explain the situation. Proving undue hardship is not easy and most of those who file for the exception are denied. For a situation to be considered as causing undue hardship, three criteria must be met:

  1. You made an effort to pay the student loans.
  2. In your current situation, using any money to repay the loans will compromise your ability to maintain accepted minimum standards of living.
  3. There is little or no chance that the situation will improve.

Very few factors can prove the third stipulation, above. For the exception to go through, you must be physically or mentally disabled to the point where work is impossible. The court does not like to discharge student loans, so disabilities are the only way to prove that your economic situation will not improve.

Student Loans Bankruptcy Consolidation

Chapter 7 bankruptcy is not the only type of bankruptcy available to the average consumer. Chapter 13 bankruptcy is a type of debt reorganization wherein your total debt is tallied up and compared to your disposable income. The court will consolidate your debts and work out a plan for you to repay them over the course of three to five years. Student loans can be included in Chapter 13 bankruptcy, and it will allow you to make low monthly payments against the loans, keeping the collectors off your back. However, because most student loans are exceptionally large, unless you have excessive disposable income, chances are that a balance will remain on the loan once the repayment plan has been completed. At this point, it will be your responsibility to repay the loans as agreed upon with the lender.

Options to Repay Student Loans without Bankruptcy

Some options are available to debtors that can make repaying student loans less of a burden without having to go through the mess of bankruptcy. Bankruptcy stays on your credit report for 10 years, so filing bankruptcy is usually not worth it if the student loans remain. Because of the high default rates, most lenders are willing to work with you on a repayment plan. Many have a graduated payment plan whereby you can pay very little while your income is low, and the payments will increase when your financial situation improves. Some lenders will even grant a temporary grace period or deferment where no payments are necessary for a specified period of time. You may also have the option of consolidating multiple loans into one loan that is easier to repay.

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