When you have outstanding student loans, bankruptcy itself does not automatically mean that your student loan debt will be discharged. Bankruptcy is a complex process, which involves detailed financial records of all your debts, monthly expenses and income sources. If your debt includes student loans, be sure to tell the attorney who will be helping you with the bankruptcy about them during your first conversation.
Student Loan Forgiveness
An alternative to declaring bankruptcy because of student loans that you may not be aware of is the 2007 College Cost Reduction and Access Act (a Federal law). It created two ways to have Federal student loan debt forgiven, outside of the bankruptcy process. The Public Service Loan Forgiveness Program only applies to Federal Direct Loans. Eligibility for this program is straightforward, but narrow:
- Your Federal Direct Loan cannot be in default
- Beginning October 1, 2007 you have to make 10 years of on time payments (120 payments).
- Loan payments made before October 1, 2007 don't count towards the 120 payments
- You have be employed in a public service job for the same time that you are making the 120 payments
- Public service job must be full time
- Public service jobs include, but are not limited to law enforcement, military service, public safety, and public education
- If you meet this criteria, at the end of the 10 years your remaining Federal Direct Loan balance and interest are "forgiven"
Another program established by the College Cost Reduction and Access Act took effect in 2009 called Income-Based Repayment. Under this plan, you can have your payments reduced to 15% of your discretionary income and if you make payments for 25 years, any remaining loan balance or interest is forgiven.
Undue Hardship
If you don't qualify for student loan forgiveness, and cannot afford to make your payments you may have no choice but to try and prove that making your student loan payments would cause you and your family undue hardship as part of your bankruptcy filing.
Proving an undue hardship means convincing the bankruptcy court in your state that because of your current expenses and income you can't repay your student loan and maintain a "minimal" living for you and your family and that your circumstances are unlikely to change for most of the time you are supposed to be repaying your student loan debt. Local case law is important here, because so much is up to the individual judge's determination.
Get Legal Help
There are other conditions under which a student loan can be discharged in a bankruptcy, but they are complicated as is the bankruptcy process. You need to discuss your individual specifics with a qualified bankruptcy attorney; that person will be in the best position to advise you how local law will affect your results, and which type of bankruptcy, if any can help with your student loan debt.
