What is Student Loan Bankruptcy?

Many people quickly assume that student loan debt is not eligible for discharge under bankruptcy declarations. However, this is not the case. By declaring bankruptcy, you may be able to get your student loan debt discharged depending on the specific circumstances of your case.

Can You Cancel Student Loan Debt Through Bankruptcy?

Although the vast majority of situations do not allow student loans to be discharged, there are conditions in which student loans can be removed through a bankruptcy declaration.

To prove your student loans should be discharged through bankruptcy, you will be required to declare Chapter 7 or Chapter 13 bankruptcy.

What is Undue Hardship?

You must show that making these payments would put an undue hardship on both you and your family. Undue hardship would make it difficult or impossible for you and your family to maintain a minimal standard of living.

Undue hardship must extend throughout the terms of your repayment plan, and you must have previously attempted to make payments on your student loan before declaring bankruptcy.

Consequences of Defaulting on Your Student Loan

Although you may hesitate to move forward with a bankruptcy declaration, defaulting on your student loan could prove more financially disastrous. If you were to default on your student loan, you could suffer from:

  • Wage garnishment
  • Unscrupulous debt collectors
  • Forfeiture of your tax refund
  • Damaged credit scores

Different Types of Student Loans

There are multiple types of student loans and the type you have impacts your eligibility for discharge through bankruptcy.

Federal Student Loans

Federal student loans do not have a statute of limitations, and since the government funds them, you can face wage garnishment and forfeiture of your tax return if you owe outstanding debts on your federal student loans.

Private Student Loans

Private student loans have a six-year statute of limitations to collect. There are also laws requiring debt collectors to follow fair debt collection practices under the Fair Debt Collection Practices Act (FDCPA).

Private student loans can be discharged through bankruptcy, while federal student loans may be more difficult or impossible to discharge.

When Are They Considered Default?

The type of student loan you have determines how long you can go without making a payment before you are considered in default. For example, if you go more than 270 days without making a payment on your federal student loans, you will be found in default.

If you go more than 120 days without making a payment on your private student loans, you will be found in default.

Consequences of Defaulting on Your Student Loans

Defaulting on your student loans could be devastating. Some of the consequences you could face include:

  • Potential wage garnishment
  • The account could be sent to a collection agency
  • Your disposable income could be garnished by up to 15%
  • Lenders could seek repayment from cosigners

What is the Student Loan Bankruptcy Process?

The process for getting your student loans discharged through bankruptcy varies depending on the individual circumstances of your case. Generally, your income determines your eligibility for a Chapter 7 or Chapter 13 bankruptcy declaration.

With Chapter 7 bankruptcy, you could discharge your debts after selling your disposable property and assets to pay back your creditors. With Chapter 13 bankruptcy, you must consolidate your debt and formulate a repayment plan to retain possession of your assets and continue paying back your creditors.

Steps in the Bankruptcy Process

Once you have declared bankruptcy, here are the steps you must take if you hope to get your student loans discharged:

  1. File for an adversary proceeding – This hearing is designed to determine whether your student loans are eligible for discharge.
  2. Present evidence that your student loans are undue hardship – Your attorney can help show that making payments on your student loans will force you and your family to maintain an unacceptable standard of living.
  3. Attend a hearing of your creditors – Your creditors could attend the hearing and challenge your request to discharge your debts. However, this is rare. The court determines whether your student loans can be partially or fully discharged at this hearing.

Your student loan bankruptcy attorney can analyze the circumstances of your case, gather the evidence you need to prove undue hardship and be by your side as you attend your adversary hearing and present evidence to support your case.

Can You Get Money Back from Illegal Debt Collection Tactics?

If your wages were illegally garnished or debt collectors used illegal tactics to collect your student loan debt, you may have the right to file a lawsuit against them in state or federal court.

Generally, the statute of limitations for cases of this nature is one year from the date the violation occurred. However, if you win your case, you could be awarded compensation for what you have been through.

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