Few student loans are ever discharged in bankruptcy. A small percentage of the population will be able to get it done by proving “undue hardship” along with a long-running “good-faith” effort to get the loans paid back.
Assuming you won’t be in that tiny percentage (less than 0.1% of petitioners even try), or that efforts to legislate student loan bankruptcy discharges won’t help you by the time you’re filing, what happens to your loans?
If you file Chapter 13, your loans will be rolled into your Chapter 13 payment. Your student loan provider will have to take whatever the trustee allows them during that time, and, like any other creditor, they will be unable to engage in collection actions against you during that time.
When the plan is over, however, you’ll owe the remainder of your student loans. The good news is you may have significantly more wherewithal to pay them at that point, since you will have gotten rid of most of the other debt-based payments currently eating up some portion of your budget.
If you file Chapter 7 the automatic stay will at least stop your student loan payments and all collection efforts for the six to nine months it takes you to get your discharge. Your loans will be put into forbearance until the case is done. You should also still be able to take advantage of programs like Income Driven Repayment after the forbearance ends.
Keep in mind, though, that if the balance of your student loans are forgiven you will end up owing the IRS taxes on that forgiven balance. It may be better to try to pay the normal loan payment if possible once you are out of bankruptcy.
Filing Undue Hardship
What does it take to file undue hardship? Unfortunately you’d have to be living in poverty with no discretionary income before the courts will even consider it. Yet if you want to take that route, you can discuss it with your bankruptcy lawyer, who will help you put your best foot forward.
Thinking about filing for bankruptcy? Don’t go it alone. You’re likely to fail, especially if you’re filing Chapter 13. Instead, get help from an experienced bankruptcy attorney who is ready to help you successfully dump (most of) your debts so you can start fresh.
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