Does Bankruptcy Cover Student Loans?

If you are unable to pay your monthly obligations to creditors, including your student loans, filling for bankruptcy might be the only option you have. However, ‘Does bankruptcy cover student loans?’ A student loan is a loan that is sponsored by a government or private institution whose goal is to provide affordable loans for educational expenses. When you graduate or stop attending school your payments on student loans begin.

Bankruptcy is a petition to the court for relief from debt. If you file Chapter 7 bankruptcy you are asking the judge to order the sale of your assets, pay off as much of the debt as the sale proceeds can, and to write-off or forgive the balance of the debt owed. If you file Chapter 13 bankruptcy you are asking the judge to help you reorganize your debt so that a new, lower but affordable payment can be made to eliminate the debt.

There are two kinds of student loans. Federal student loans are made under the Perkins loan program and private student loans are made by institutions that are not part of a government program. The judge will look at the type of loan that you have to determine if the loan can be discharged by bankruptcy laws.

If your loan qualifies you for an income tax deduction when you file your income tax return with the Internal Revenue Service (IRS) at the end of each tax year, then you will not be able to receive forgiveness for the debt. Even if you were eligible for the credit, but did not claim it on your return, the judge will not forgive any debt on a student loan that qualifies as a tax deduction.

Chapter 13 Bankruptcy is called reorganization or wage earners plan because only those who have stable and sufficient income can qualify for this type of bankruptcy. The individual can keep the assets and a court-appointed trustee will be responsible for creating a plan to repay the creditors within a five year period or sooner.

Student loans can be included in Chapter 13 repayment plans and doing so can substantially reduce the amount of the monthly payments due on the student loan. The balance of the student loan debt must be paid even when the period of time set forth by the judge for debt repayment has expired.

Chapter 7 Bankruptcy is called liquidation bankruptcy because the assets are liquidated, or sold, and the court-appointed trustee distributes the proceeds to each creditor listed in the bankruptcy petition. This is the bankruptcy that is most commonly filed by petitioners for debt relief. Once all the funds from the sale of the assets have been distributed to each of the creditors, the judge will discharge the remainder of the debt.

The creditor must accept the ruling of the judge and cannot pursue the debtor for payments that were not covered by the distribution of the trustee. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 states that all student loans, federal or private, cannot be discharged through Chapter 7 bankruptcy.

If an individual can show undue hardship the judge may grant a discharge of the student loan debt. This can apply to the borrower and the dependents of the borrower. The debtor must show a good faith effort to pay on the loans. They must prove to the judge that they cannot pay and still maintain a minimum living standard. The debtor must show why the financial situation is unlikely to change in the future.

If you are filing for bankruptcy and you want to request a hardship discharge, you must file a separate motion. Sallie Mae states that hardship discharge will be difficult to prove unless the individual is physically unable to work. With that said, ‘Does bankruptcy cover student loans?’ The answer is no unless you can prove to the court that your inability to work due to a physical disability will not change in the near future.