Does Bankruptcy Erase Student Loans?
Rutgers University's John J. Heldrich Center for Workforce Development, performed a study revealing that only 56 percent of its 2010 graduates were able to find jobs. If you, like Rutgers' unfortunate 44 percent, have had trouble finding work or maintaining your student loan payments, bankruptcy as it stands, will offer you limited relief.
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Student Loans
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The ability to wipe out student loan debt has fluctuated over time. Before 1976, student loans could be discharged in bankruptcy. Before 1984, private student loans that weren't issued by nonprofit institutions were dischargeable. In 2005, Congress made virtually all student loan debt nondischargeable. In 2010, members of Congress introduced a bill to make private student loans dischargeable again; however, the bill has not yet become law at the time of publication.
Chapter 7
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As a general rule, you cannot erase student loan debt in a Chapter 7 bankruptcy. Chapter 7 bankruptcy erases nonpriority unsecured debt, such as debts owed to credit card companies. Chapter 7 generally does not erase priority debts, such as child support and student loans. Priority debts are obligations that Congress, for public policy reasons, excluded from dischargeability.
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Chapter 13
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Chapter 13 will not erase your student loan debt, but it will help you get caught up on it. Your student loan creditors can employ aggressive collection practices to recover what you owe. Chapter 13 stops all that, and allows you to pay your past due student loan debts through a payment plan. As an added benefit, in a Chapter 13, you get to keep property that Chapter 7 may require you to give up.
Undue Hardship
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While bankruptcy generally will not erase student loan debt, there is an exception. If you can prove your student loan imposes an undue hardship on you, then the court will allow you to discharge it in bankruptcy. Bankruptcy courts generally apply what's called the Brunner test to determine if your student loan is dischargeable. It requires you to prove you cannot maintain the minimal standard of living if you're forced to repay the loan; things are likely to stay that way for most of your loan's duration; and you have made a good faith effort to repay the loan.
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References
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