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Student Loans and Bankruptcy

  • Wednesday, September 4, 2013

    Student Loans and Bankruptcy: Can I Kick Sallie Mae to the Curb?

    Nope. Sorry. You probably can’t.

    You can discharge all kinds of debt in bankruptcy such as credit cards, medical bills, personal loans and the like.  And if you are willing to part with the collateral, even car loans and houses can be wiped clean off the books.

    Death and Taxes

    There are a few debts that you can’t eliminate in bankruptcy. An awful lot of them have one thing in common, and that is the federal government. Unfortunately, the vast majority of student loans just happen to be federal loans.

    “Are you telling me the same government that creates the bankruptcy laws somehow gives preferential treatment to itself as a creditor?”

    Yep, that’s what I mean.

    Can they really do that?

    It’s right there in the federal bankruptcy code. Student loans are not dischargeable in bankruptcy; no “if’s” “and’s” or “but’s” about it.

    But there has to be an exception!

    Of course there is an exception to the rule. It couldn’t be that straightforward. After all, this is the federal government we are talking about. They keep things complicated.

    A Burdensome Hardship Crisis Catastrophe

    The only way to discharge your student loan debt in bankruptcy is to prove that it creates an “undue hardship.”

    “Oh, well that’s easy,” you say.  I’m paying Sallie May 400 dollars a month for the next 30 years. “Talk about a hardship!”

    Not so fast. Here’s how it works.

    1)      You must prove that a “minimal standard of living” cannot be maintained if you continue to pay your loans. Each state treats this differently, but everywhere you go a “minimal standard” is extremely minimal.

    2)      You must prove that this “minimal standard of living” will never be achieved while paying back the loan. In other words, you will never get a raise or a better job for the entire time you owe the debt.

    3)      You must prove you have made a good faith effort to increase your income. This is more than just sending out a few resumes. Rather it’s a continual, diligent effort to find employment before your bankruptcy.

    Am I Out of Luck Then?

    As with all things, there are those rare, anecdotal exceptions where people actually have had their student loans discharged. But most seasoned bankruptcy attorneys will tell you that unless your circumstances are extreme, it is exceedingly difficult to prove that the student loans are causing you an undue burden. Consequently, having them discharged is nearly impossible.





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