Does Bankruptcy Clear Student Loans?
Bankruptcy is the legal process by which debtors can be relieved of their obligations to pay debts and obtain a fresh start. There are two basic methods of bankruptcy resolution: liquidation and reorganization. Under a liquidation bankruptcy, the debtor's assets are sold off under the court supervision to pay off debts. Any debts that cannot be repaid are generally discharged and the borrower is allowed a minimum allocation of assets with which to start all over. Reorganization bankruptcies allow debtors to pay off their debts over time under court supervision. Some debts, however, are not dischargable in bankruptcy.
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Types of Bankruptcy
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There are several chapters in the U.S. Code that deal with various kinds of bankruptcy. Chapter 7 governs general personal and small business liquidations, while Chapter 11 deals with small business reorganizations and larger personal bankruptcies. Chapter 12 is reorganization bankruptcy with special allowances for family farmers and fishermen, and Chapter 13 governs individual reorganizations for those with a regular source of income that will enable them to pay at least part of the amount owed to creditors.
Dischargeable Versus Nondischargeable Debts
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Some kinds of debts are not dischargeable in bankruptcy, or only dischargeable under certain circumstances. There are 19 categories of debt that are not dischargeable in all cases other than Chapter 13. Some forms of tax debt are not dischargeable in bankruptcy, nor are child support payments, fines assessed due to criminal activity, debts you incur for deliberately injuring someone, debts to government agencies for fines and penalties and debts for most government student loans including guaranteed student loans.
Chapter 13 allows for the discharge of willful and malicious injury to property, debts incurred to pay taxes not dischargeable and debts from divorce property settlements.
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Specific Treatment of Student Loans
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If your student loan came from a government source, or if it was guaranteed by a government source, it is generally not dischargeable in bankruptcy, regardless of how old the debt is. This includes Sallie Mae debt.
In 2005, Congress made even private, nonguaranteed student loan debt nondischargeable in bankruptcy.
Exceptions to Nondischargeability of Student Loans
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Although the general rule is that government-guaranteed and government-funded loans are not dischargeable in bankruptcy, there are certain exceptions for hardship cases. The burden of proof is high, however, unless you can prove disability and an inability to work. To request discharge of student loan debt, you must specifically petition a judge on this matter. You must prove that you cannot provide a minimum standard of living for yourself and your dependents if you continue to make scheduled student loan payments.
Considerations
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Bankruptcy should be a last resort, when other efforts to repay your bills have become hopeless. Although negative credit information stays on your credit report for up to seven years, bankruptcy information stays on your report for up to 10 years. Furthermore, a bankruptcy can have significant consequences on your ability to obtain credit, a home loan or even a job. Before you file for bankruptcy, consider contacting your creditors and arranging a payment plan or settling the debt for less than you owe.
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