Will Bankruptcy Get Rid Of My Student Loans?

Bankruptcy Courts Make It Tough To Rid Student Loans

Bankruptcy courts around the country toughened up on helping students discharge student loans beginning in 2006.  Many still do not realize the scope and extent of the lifelong financial burden they saddle themselves with when taking out student loans. Student loans are preventing thousands of college graduates from purchasing their first homes.  After all, living expenses are higher and salary levels are lower than anticipated, making student loan debt repayment difficult if not impossible.

If this is you, you might be wondering if you can turn to bankruptcy for relief and a fresh start. The chances of bankruptcy being the solution is slim.  That is because not all debt is not treated equally in bankruptcy. While bankruptcy is great for getting rid of medical bills and credit card bills it is terrible for getting rid of student loan debt.  Most chapter 7 and chapter 13 debtors accept that this debt will remain after filing for bankruptcy.

While Tough, It Is Still Possible Rid Student Loan Debt  

Bankruptcy courts will not discharge student loans except in one narrow circumstance. You have to show undue hardship.  This is a very tough standard to meet.  Some bankruptcy courts require showing not being able to maintain a minimal standard of living, with no hope of a positive change in financial circumstances for some time.  The bankruptcy judge will also look to see whether there was a good faith effort to repay student loans in the past.  

In short, this is what the bankruptcy court is looking for when determining whether is will discharge a student loan from a debtor:

• PRESENT INABILITY TO PAY

What kind of lifestyle is the debtor living?  A bankruptcy court will want to see that after living a frugal life, i.e. paying for apartment rent, food and other necessaries, a debtor does not have any money left over to pay his Lenders. 

• PERSISTENCE OF FINANCIAL CIRCUMSTANCES DURING THE REPAYMENT PERIOD

A bankruptcy court not only requires a present inability to pay, but also requires a prediction about future ability to pay. Factors to consider include a debtor's mental and physical health, dependent's needs, age and other conditions affecting earning capacity. Also considered are prospects for income in the debtor's profession. One bankruptcy court noted that the "most important factor" to satisfy this element is that the debtor's circumstances must "be beyond the debtor's control, not borne of free choice."

• GOOD FAITH EFFORT TO REPAY 

Finally, bankruptcy courts will analyze whether the debtor had made a good faith effort to repay the loans. One court found that even though a mother made over $18,000 in payments, the debtor failed to show good faith by only making one payments and not applying a tax refund he had received.  

In denying the debtor's attempt to discharge the student loans, the bankruptcy court wrote that Debtor and the Lenders "will have to live, uneasily it seems, with the consequences of the bargains they improvidently struck at the beginning of their relationship."


Ouch! present day students need to take heed and understand that today's student loans will have consequences that can effect their financial situations throughout their life.

Southeastern Seminary at Flickr

What Happens at a Chapter 7 Meeting of Creditors?

After filing a chapter 7 bankruptcy, you will be required to attend "the meeting of creditors".  The meeting takes place at court around 45 days after you file bankruptcy. If you have to attend the hearing.  If you do not attend, the trustee, who runs the meeting will likely file a motion asking the court to dismiss your case.   

The meeting is referred to as the "meeting of creditors" because creditors are notified that they may attend and question you about your assets and any other matter relevant to the administration of the case. The good news is that creditors rarely attend the meeting.  On the rare occasions when they do, they are usually trying to locate secured property.  Commonly I see jewelry shops shops asking for the location and return of jewelry where the debtor defaulted on the loan.  Other creditors may ask questions to see whether a debtor should be in a chapter 7 when they can afford to pay back their creditors.  Again, it is rare that a creditor shows up to ask questions.  

The meeting usually lasts only a few minutes and may be continued if the trustee is not satisfied with the information provided by the debtor. Often meetings are continued when the debtor fails to provide acceptable identification and proof of Social Security number. Also, many debtors fail to send the trustee tax returns and pay stubs 7 days before the hearing, per California Eastern District Bankruptcy Court rules.  In short, make sure you are prepared for the meeting.  If you have hired an attorney, the attorney will make sure to send the documents to the trustee and remind you to bring your driver's license and social security card to the meeting.  

If you fail to provide the information requested at the meeting, the trustee will likely set another date for you to return to provide the information.  Multiple instances of non-compliance will likely lead to the trustee requesting that the bankruptcy case be dismissed or that the debtor be ordered by the court to cooperate or be held in contempt of court for willful failure to cooperate. 

The information enables the trustee to understand your financial circumstances for filing bankruptcy and speeds up the questioning process. The trustee will ask questions to ensure that your financial information is correct, that you do not have assets that can be sold with proceeds going to creditors and to make sure you understands the positive and negative aspects of filing for bankruptcy. 

Photo Credit: IAEA Imagebank at Flickr