How to Get Student Loans Discharged in Bankruptcy

Getting student loans discharged in bankruptcy means you will have no remaining obligation to make the payments on either principal or interest rates. Student loans are treated differently in a bankruptcy proceeding than other debts, which are typically paid through a payment plan or liquidation of assets. You may only have your student debt totally forgiven in very specific circumstances:

Step 1: File for Bankruptcy

The first step in this process is filing for bankruptcy. Personal bankruptcy typically takes the form of a Chapter 7 or Chapter 13 filing; Chapter 11 is typically used by businesses. Chapter 7 is a complete and total liquidation of assets to cover the cost of debts. Your home, car and other assets will be sold. This only works for a person with assets sufficient to cover debts but not enough income to pay them in another manner. Chapter 11 is a reorganization of debt under a new payment plan. You may have student loans forgiven in either case, but it is more likely in a Chapter 7 filing.

Step 2: Prove you cannot Meet Debt Obligation

You will have to show the court your financial standing to prove you cannot meet the debt payments given your current income and expenses. If a reorganization of the payments will allow you to cover the debt, then it is unlikely the court will discharge that debt. People who qualify for a discharge will not be able to make ends meet given their current student debt if they are asked to pay it.

Step 3: Prove Immediate and Persistent Financial Crisis

The reason you are not able to meet your debt obligation must be immediate and it must be persistent. For example, if you just lost your job last week, you may not qualify yet. There is still a chance you will find employment in the near future. However, if you have become ill or disabled and cannot continue working, this is likely to be a more persistent problem. The court is looking for a reason other than mismanagement of funds to explain why you cannot pay off the debt. If you have simply overextended your debt obligations, then the court is likely to work toward either a settlement or payment plan instead of a discharge. 

Step 4: Prove you Made Effort to Pay

Finally, you must show you made a "good faith" effort to pay the loan when it was due. This basically involves showing multiple payments you have already made toward the debt. Those payments should have been timely, and they should have been regular. It is also best to show you responded to attempts to collect through efforts to make some amount of payments, even if those payments were not in full. If you did not make an effort to pay off the loan before your given financial crisis, then a court is unlikely to discharge that loan altogether. Again, a settlement or other payment plan would be more likely.

Student Loans are not easily discharged by the courts so keep that in mind when filing. Because student loans are often federal assistance, most courts will require they be paid off slowly.

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