Declaring bankruptcy can be a tough call to make. On one hand, you'll get to relieve yourself from your debt burden, but on the other hand, you may have to damage to your credit report and deal with unwanted fees.
Student loans and bankruptcy usually don't fit. They are no doubt the hardest type of debt to discharge when you declare bankruptcy. If you were to file Chapter 7 or Chapter 13, your student loans would be exempt unless you were able to prove an 'undue hardship.'
An undue hardship is a situation that affects you and/or your dependents that prevents you from paying off your student loans now and in the future. It is a very difficult case to prove. With that being said, it is possible to discharge your student loans during bankruptcy, but it is not common.
How You Can Discharge Your Student Loans During Bankruptcy
First, you'll need to file for Chapter 7 or Chapter 13 bankruptcy with a law firm's assistance. The court will most likely deny your request to discharge your student loans, but this is why you must file a separate adversary proceeding to prove the repayment of your student loans would cause an undue hardship.
A few years ago, a borrower received a partial discharge for his student loans by using this technique of filing a separate lawsuit within the original bankruptcy case.
Each borrower who wishes to discharge their student loan balance through bankruptcy needs to prove three things to prove undue hardship:
1. Lack of Income – If the borrower is forced to continuing paying back their student loans after bankruptcy, they will not be able to maintain a suitable standard of living for him or herself or any dependents.
2. Duration – The financial hardship circumstance the borrower is undergoing will continue for a significant portion of the loan repayment period.
3. Good Faith – The borrower has made a good faith effort to repay the loan prior to bankruptcy.
If you can prove all of these things without doubt, you may have a shot at having your student loans discharged, but you must also consider all the legal fees, court battles and damage to your credit that will result from filing bankruptcy.
Mind you, the man who received partial bankruptcy spent the past 10 years battling in court for it. If you are struggling with debt and undergoing a financial hardship, you must first consider whether filing bankruptcy is worth it or not to you. Here are a few alternatives to filing bankruptcy in order to discharge your student loan debt.
Refinance Your Debt
If you are having a hard time making student loan payments, consider refinancing your student loans to obtain a lower interest rate. You can also even request to extend your term so your minimum payments will be lower and more affordable.
Consider Student Loan Forgiveness
Student loan forgiveness programs will discharge your partial or full student loan balance if you work in certain job fields for a specified amount of time. Teachers, some in the medical field, and government employees are all eligible for student loan forgiveness. It's certainly worth it to see which programs may be best for you.
Take Advantage of Other Federal Loan Relief Programs
If you have federal student loans, don't choose bankruptcy until you've applied for deferment or forbearance. If you are going through a rough time financially, deferment will allow you to postpone your student loan payments for a full year. You can even request an income-based repayment plan that would lower your payments to a more reasonable amount based on your income or even temporarily place your payment amount at $0 if you are unemployed.
An Important Judgment Call
Determining whether to file for bankruptcy is a very important judgment call you need to make. While there's no right or wrong answer whether you should attempt to get your student loans discharged, you must consider all aspects of the process and weigh the pros and cons of bankruptcy. Are there any other alternatives you can consider? How much will bankruptcy cost and how will it affect you and your finances long-term? How bad is your situation?
These are all important questions to ask yourself when contemplating your final decision.