What Happens to a Defaulted Student Loan in Bankruptcy?

Getting rid of defaulted student loans in bankruptcy requires extreme financial hardship.

Filing for bankruptcy is an option for people having difficulty paying student loans and other bills. It is extremely difficult to get rid of student loans due to the laws established in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. Unless the student loans are discharged in the bankruptcy, they still need to be paid. Getting other debts discharged in the bankruptcy can make it easier to pay student loans going forward.

Bankruptcy Petition

Provide information regarding the defaulted student loan in the bankruptcy case. List the name and address of the lender in the bankruptcy petition. State the total amount owed for the loan, including any late fees or collection costs that have accrued. The lender needs to know that a bankruptcy case was filed. The bankruptcy court will send the lender a notice stating where the case was filed, the case number, and the name of the person who filed for bankruptcy protection.

Discharge of Student Loans

Proving that student loan payments pose an undue hardship is required in order to get rid of such a loan in bankruptcy. A student loan is eligible for discharge if making the payments hinders your ability to maintain a minimal standard of living; those financial conditions are likely to stay the same throughout the loan-repayment period; and good-faith efforts have been made to pay the loan. File a complaint with the bankruptcy court if an undue hardship exists and the financial circumstances will not improve in the future. The bankruptcy judge decides if the student loan should be discharged or should still be paid.

Payment of Student Loans

Chapter 13 bankruptcy requires paying off debt over a period of three to five years. Participating in an affordable payment plan is an opportunity to bring the student loan account current over an extended period of time. While the bankruptcy case is active, the automatic stay provision prevents a lender from directly contacting the borrower regarding the debt. The lender also cannot pursue other collection activity such as wage garnishment or garnishment of tax refunds during the bankruptcy.

Students Loans Post-Bankruptcy

After the bankruptcy case is closed, the remaining balance of the student loan needs to be paid if it wasn't discharged or paid off in the bankruptcy. Getting other debts discharged in a bankruptcy can help make paying the student loan more manageable. Contact the lender if there is still difficulty paying the loan after the bankruptcy. Find out what repayment and deferment options are available to avoid defaulting on the loan.

References

• American Bankruptcy Institute; Debtor's Duties
• American Bankruptcy Institute; Exceptions to Discharge
• Moran Law; Brunner v. New York State Higher Education Services Corp. 831 F.2d 395
• American Bankruptcy Institute; Automatic Stay
• U.S. Courts; Chapter 13 - Individual Debt Adjustment