Does Bankruptcy Forgive Student Loans?
Congress was granted the authority to enact bankruptcy laws by Article I, Section 8, of the United States Constitution. Bankruptcy laws have evolved considerably since the early days of the republic. Legal opinions handed down by the U.S. Supreme Court in 1934 established the purpose of bankruptcy as providing relief and a fresh start for honest but unfortunate debtors. Although bankruptcy does provide relief from most types of debt, student loans are typically not forgiven by bankruptcy proceedings.
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Function
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Bankruptcy is designed to provide debtors with the ability to resume their life endeavors, unencumbered by the pressure of overwhelming debt. Federal bankruptcy proceedings release debtors from any obligation to repay discharged debts and prevents old creditors from pursuing collection efforts. In some cases the debtor's assets may be sold to pay off old debts.
Types
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There are several different types of bankruptcy, but individual debtors typically file under either Chapter 7 or Chapter 13 of the U.S. Bankruptcy Code. Chapter 7 Bankruptcy, sometimes referred to as Liquidation Bankruptcy, involves the liquidation of the debtor's assets by a trustee of the court. The proceeds are distributed to the creditors based on the precedence of their claim. Chapter 13 Bankruptcy, sometimes referred to as the Wage Earner's Plan, allows the debtor to maintain possession of her property while she makes regular payments to the trustee, who distributes funds to the creditors. Neither Chapter 7 nor Chapter 13 Bankruptcy will discharge a student loan.
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Considerations
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According to the Administrative Office of the U.S. Courts, Congress is responsible for determining what types of debts are dischargeable by bankruptcy and which are not. The U.S. Courts lists up to 19 categories of debt that may not be discharged under Chapter 7 or Chapter 13 of the U.S. Bankruptcy Code. Items which may not be discharged by bankruptcy include tax debts, debts for child support or alimony and debts incurred for educational loans that are funded or guaranteed by the government.
Hardship
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Debtors may claim repayment of student loans will present an undue hardship on the debtor and her dependents, according to the Moran Law Group. Claims for relief due to hardship are not automatically considered by the bankruptcy court. Debtors must file a petition with the court in order to obtain a determination of hardship.The Student Loan Borrower Assistance notes that different courts may use different tests to determine whether the student loan actually presents an undue hardship on the debtor.
Benefits
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Discharges of student loan indebtedness by bankruptcy proceedings is rare. Filing for bankruptcy does provide relief from all collection efforts, including the collection of student loans, while bankruptcy proceedings are in process or unless the creditor obtains permission from the court.
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