Discharging student loan in bankruptcy requires major hardship

By Tanisha Warner

Credit Care

Tanisha Warner is the communications manager for Money Management International, where she manages educational content designed to teach consumers about personal finance topics. Ask a question 'Credit Care' archives

Dear Credit Care,
How can I file bankruptcy on my school loans? I don't have a job and haven't had one in over a year. The loan company keeps adding interest to the back of my loans. I will never be able to catch up again. How can I clear that loan from my name? -- RJ

Dear RJ,
Student loan debt is not easy to walk away from. In fact, private and federal student loans are not eligible for discharge in a bankruptcy filing unless you can prove that paying them would produce an "undue hardship" for you and your dependents. The burden to prove undue hardship varies from state to state and court district to court district.

You might consider doing some research and/or contacting a bankruptcy attorney to get advice. Keep in mind that in most cases you must prove three things for the loans to be considered an undue hardship.

1. You cannot maintain a minimum standard of living and repay your loans in your current situation.
2. Your current situation is likely to continue for some time.
3. You have made good-faith efforts to pay your loans.

If you do not meet all three of the above criteria, it may be difficult to prove to the court that paying your loans would cause undue hardship.

It sounds as if your loans may already be in default. However, if they are not and if you have federal loans, contact the Department of Education and determine if you are eligible for the Income-Based Repayment (IBR) Plan. Due to the fact that you are currently unemployed, you may qualify for zero payments under the IBR plan until you find a job. Once you gain employment, the IBR plan would allow for a monthly payment of no more than 15 percent of your discretionary income. The plan also allows for a 25-year cancellation of the remaining balance of your loans if you repay and meet certain other requirements. (For loans taken out after July 1, 2014, the maximum monthly payment will drop to 10 percent of discretionary income and a cancellation will be possible after just 20 years -- but that's still far off.)

In addition, if you find work in public service, your payments on the IBR plan may be eligible for the Public Service Loan Forgiveness program where your loan balances may be forgiven after 120 payments while employed full-time in the public service sector.

Should you have private student loans, they are not eligible for the IBR or Public Service Loan Forgiveness programs. However, Congress is currently proposing bills that would provide relief for private student loan borrowers. The proposed legislation could change the bankruptcy laws to once again allow private student loans to be eligible for discharge.

As with any obligation, ignoring the problem will not make it go away and, in most cases, will make things worse. I recommend that you contact your student loan providers, let them know you are unemployed and searching for employment and request their help in determining what assistance programs may be available for you.

Handle your credit with care!

Tanisha Warner is the communications manager for Money Management International, the largest nonprofit, full-service credit counseling agency in the United States. She manages educational content designed to teach consumers about personal finance topics. You can find more money management advice on Blogging for Change and MMI's Facebook page.

Credit Care answers a question about a debt or credit issue from a CreditCards.com reader each week. Send your question to Credit Care.

Published: January 23, 2012

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