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The truth about bankruptcy and student loans

On Behalf of | Oct 4, 2019 | Debt Management

One of the things you may know about bankruptcy is that you cannot discharge student loan debt. However, that is not always true. While most cases in Tennessee will not qualify to discharge student loans, there may be some that do. So, it is always worth checking into for your particular bankruptcy situation.

Among other things, discharging student loan debt requires meeting a hardship requirement, according to Forbes. You need to understand what this requirement means and how it works before you try to eliminate your student loans through bankruptcy.

Hardship test

To prove your student loan debt causes you undue hardship, you need to show that you cannot repay your loans while maintaining your living standards. Do note that the court will look at minimum standards to determine this. You must also show the following:

  • You have attempted other payment arrangements to pay your loans
  • Your financial circumstances are unlikely to ever charge

The first item is important because there are many different payment program options. For federal loans, you may qualify for an income-based repayment plan. If your income is low enough that you would seek discharge of your loans, then your payment under this type of plan is likely to be zero.

If you have private loans, you may not have as many repayment options. This may be a situation where you may want to attempt discharge.

The past and future of student loan debt

Decades ago, you could eliminate student loans in bankruptcy. However, laws changed so that now it is very difficult to do so. This was to help prevent fraud and issues with students borrowing money, getting an education and then filing bankruptcy.

There is some current work to try to find a solution for student loan debt. You may see laws changing in the future. While they may never be fully dischargeable in bankruptcy, there may be solutions on the horizon to make this type of debt less of a financial hardship.