How to File for Bankruptcy to Avoid Paying a Student Loan

In 1998, Congress enacted changes to the U.S. Bankruptcy Code that made student loans non-dischargeable in bankruptcy, unless the debtor is successful in claiming that repaying the loans would lead to substantial hardship. In October, 2005, the law was extended to include private student loans as well. Here are some steps to determine if your student loans have a chance of being discharged under the new Bankruptcy Code.

Difficulty:

Moderately Challenging

Instructions

1. Student loans have a special status under bankruptcy law. If any portion of your student loan debt came from a government or non-profit source--and virtually all of them do--you will be stuck repaying your student loans even if you declare bankruptcy. The only exception is if you are able to successfully argue to the Bankruptcy Court that forcing you to repay the loans would cause 'undue hardship' on your financial future.

2. If your debts are overwhelming and you are not certain where to turn, find an experienced bankruptcy lawyer to discuss your options.

3. If you file for bankruptcy and you owe money to a bank or other financial entity for student loans, but under no circumstances could you afford to repay them, file an undue hardship petition with the bankruptcy court.

4. Show that you have made good faith efforts to repay your loans. Keep copies of cancelled checks, receipts and letters of communication you might have sent to your student loan creditors as you attempted to repay the loans.

5. You will need to convince the U.S. Bankruptcy Court you cannot repay your student loans and maintain a minimal standard of living.

6. Demonstrate that these unacceptable conditions would persist if you were forced to repay your student loans, and that despite your best efforts, you cannot fix the situation. While having a low-paying job may be a persistent condition in your situation, it is not considered unfixable, unless extraneous circumstances exist. What that means is that if you are purposely working at a fast-food restaurant or holding similar employment just so you can claim undue hardship, the excuse won't impress the Court, unless you have legitimate reasons for this situation.

Tips & Warnings

• Declaring bankruptcy wreaks havoc with your credit rating and has many serious consequences. A chapter 7 filing remains on your credit record for ten years, so before taking that drastic step, be sure you have exhausted all other measures first.