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Three Things You Need To Know About Bankruptcy And Student Loans

Posted By admin || 19-Mar-2010

Student Loans

Facts About Bankruptcy and Student Loans

Student Loans are Very Difficult to Discharge in Bankruptcy

However, they can be discharged in either Chapter 13 or Chapter 7 bankruptcy under certain circumstances. There are two main reasons for discharging student loans in bankruptcy:
  • If the debtor dies
  • if repaying the debt would cause an undue hardship on the debtor.
The fact that "undue hardship" has not been clearly defined has caused debtors to experience varying degrees of success when attempting to discharge student loans in bankruptcy.

Student Loans Must Be Repaid Before Other Debts

When a debtor files for bankruptcy, student loans are treated as one of the "priority" debts that must be repaid before certain other creditors.  What this means is that if a debtor files Chapter 7 bankruptcy, his/her other unsecured debts may be discharged, but student loan creditors cannot be discharged in bankruptcy and once the bankruptcy case is closed, the debtor must resume payments on the student loans. And in the case of Chapter 13 bankruptcy, student loans will receive full repayment while some other creditors may only receive partial repayment during the 3 to 5 year life of the Chapter bankruptcy.  This however can be beneficial for the debtor, since more of their income will go to paying off student loans as opposed to other types of creditors.

You Can Face Wage Garnishment

Student loan lenders have incredible powers when it comes to collecting on delinquent student loan debt .  If, after a debtor emerges from bankruptcy, they fail to repay their student loan, they could face wage garnishments and other asset seizures by their student loan lender.  Debtors filing bankruptcy who have student loans must make sure they have a solid plan for repaying their student loans if they want to avoid new credit problems after bankruptcy.
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