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What you should know about bankruptcy and student loans

On Behalf of | Apr 3, 2023 | Bankruptcy

In the past, you may have heard that bankruptcy proceedings do not allow for discharging federal student loans and even private loans. However, laws have changed, and you can now discharge these debts.

This is what you should know about student loan discharge during bankruptcy.

Chapter 13

Chapter 13 bankruptcy reorganizes your debt, so you still have to repay it. This includes your student loans. However, you will receive better loan terms, including lower interest rates and payments. This process typically lasts up to five years.

However, once you receive a discharge of your bankruptcy, you have other options for your student loans. For example, you can claim undue hardship, and you can ask for the prioritization of your student loans through your bankruptcy plan.

Undue hardship

During your Chapter 7 bankruptcy, you can claim that paying your student loans is an undue hardship. Most courts use the Brunner test to determine hardship. For example, judges will evaluate whether paying your loans will impact your “minimal” standard of living and whether your financial status will remain consistent or change over your repayment period. They also search your records to determine whether you have tried to pay your loans, in good faith.

When you prove hardship

The courts will do one of three things if you prove undue hardship. First, they can discharge your entire loan amount. They can also discharge part of your loan amount, leaving the rest for you to repay. Third, a judge can require that your creditor adjust your loan terms, such as lower interest and payments, but you will have to repay your loans in full.

Federal student loan discharge is not automatic during bankruptcy. Therefore, prepare to prove that you cannot pay these debt payments.

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