What Constitutes an Undue Burden of Cancellation of Student Loans Through Bankruptcy?
While bankruptcy gives you the ability to discharge unsecured debts, student loans are typically an exemption to this. Federal bankruptcy law only grants you the ability to have your liability for unpaid student loans discharged if you can prove that paying the loans places an undue hardship on you and your family. The same standards for undue hardship apply whether your student loan is federal or private.
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How It Works
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You must file Chapter 7 bankruptcy to be eligible for an undue hardship discharge to your student loan. Chapter 7 bankruptcy is the only form of personal bankruptcy available to debtors that offers a complete discharge of unsecured debts. Each state maintains an income threshold for Chapter 7 bankruptcy petitions. If you earn more than the average median income in your area, Chapter 7 -- and an undue hardship discharge -- is not an option.
If you hope to qualify for an undue hardship discharge, you must be able to present proof to the court that making the minimum monthly payment on the loan would leave you under such financial duress that you would be unable to maintain a minimal living standard. You must also demonstrate your inability to repay your student loans is likely to continue in the future.
Undue Hardship Petition
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Although the bankruptcy court thoroughly reviews your financial situation, the court will not automatically issue you an undue hardship discharge just because you qualify for it. If you feel you qualify to have your student loans discharged, you must file a formal petition with the court, known as an adversary proceeding, requesting that the judge review your case for an undue hardship discharge.
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The Court's Decision
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The decision of whether to approve your undue hardship petition rests with the bankruptcy court judge. When reviewing your petition, the judge will consider your current financial situation, your ability to work, your health conditions, if any, the amount you owe and if you made good faith attempts to pay your student loan debt in the past.
Loan Cancellation
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Although private lenders have differing standards when cancelling a borrower's liability for repayment, the federal government discharges your responsibility for federal student loans if you become permanently disabled and unable to work or your school closed or lost its accreditation before you could graduate. If you meet the eligibility requirements, you can request a liability discharge from the U.S. Department of Education or your private lender directly without filing for bankruptcy -- regardless of whether you suffer from a financial hardship.
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