Can Private Student Loans Be Included in Bankruptcy

Student loans are often the ideal solution to helping someone earn a college degree which can lead to an improved quality of life, as well as a significant increase in wealth over their lifetime.

However, they can also be a long term burden to anyone’s finances. This is because new graduates are often in the process of locating work when they need to take on high monthly payments to pay down their student loans. The process can become extremely overwhelming within just a few months after graduation.

Research indicates that over one-fourth of recent graduates have gone for lengthy amounts of time avoiding paying their student loans. For many graduates, filing for bankruptcy might appear as the only solution for eliminating huge amounts of debt.

However, those who try it are in for a rude awakening, as most of the available bankruptcy solutions usually make it nearly impossible to get rid of debts from student loans.

The current laws usually require that individuals with student loans will need to continue making their monthly payments even while going through and completing bankruptcy. However, it is not 100% impossible to find loopholes in the bankruptcy law to eliminate student loans, though it is often a difficult and lengthy process.

Defaulting on Student Loans

Most individuals considering filing for bankruptcy are usually already in default on their loans. This means that they have likely already missed paying at least nine months on their student loans.

With the national default level being approximately 10% on student loans, it is a serious concern to the government that backs the loans, and the lenders that make the debt.

Ignoring the Debt

By far, a worse option is to simply ignore the debt and avoid paying the student loan. Once an individual has fallen into default on their government-backed loan, the federal government can excise their extraordinary powers for collecting the debt. They can make substantial hardships on the individual including seizing tax refunds, garnishing wages, or holding back Social Security benefits. It can even place liens on the individual’s property and bank accounts.

Unlike traditional debt, the federal government places no statute of limitation concerning federally backed student loans. Instead of attempting to simply ignore the issues concerning student debt, a better solution is to take effective action as quickly as possible. This is true even if it means filing for bankruptcy.

Discharging Student Loan Debt

Attorneys that work with discharging student loans need to follow strict guidelines. The attorney will work with their client in an effort to show specific cause, which is usually “undue hardship” on handling the debt.

Typically, the attorney might be able to show that it is impossible for the individual to repay their student debt while still being able to maintain the most basic standard of living for themselves and their dependents. The attorney will also calculate the individual’s current income, their monthly expenses paid at minimal payment amounts along with the current poverty level.

The attorney often uses the basis of “certainty of hopelessness.” This helps the lawyer in maximizing the benefits of this tool if the graduate with student debt qualifies as having a serious mental or physical illness, or permanent disability. In addition, there may be extenuating circumstances that have lasted for years that make it impossible to repay the loans and pay down the debt.

The above criteria are often open to interpretation by the judge, who can use a fairly subjective scale. Every court system and judge is unique, and will often bring their own variations on determining exactly what undue hardship is in the local community. As a result, the attorney often asks for a discharge of student loans when the bankruptcy proceedings are concluding.

If you would like to receive more specific information regarding student loans, please contact us today for a consultation.