Bankruptcy

The borrower's bankruptcy options on defaulted student loans have shrunk to a very few. Changes to the Bankruptcy Code in late 1998 made defaulted student loans non dischargeable, regardless of the age of the loan, unless the borrower can establish substantial hardship.

Absent a showing of substantial hardship, the best that bankruptcy can do with respect to Bankruptcy and defaulted student loans may be to eliminate other debts that compete for the borrower's dollars, or to provide a measure of peace during a Chapter 13 plan. Some courts will permit debtors to separately classify bankruptcy and defaulted student loans in Chapter 13 and pay them a greater percentage than other non secured debt.

Defaulted student loans are no longer dischargeable in bankruptcy just because they have been in pay status for the requisite time. The only way the loan can be modified or discharged is by proving that repayment of the loan will create an undue hardship on the debtor/borrower and his family.

This standard is generally interpreted to mean that the borrower cannot maintain a minimally adequate standard of living and repay the loan. It usually requires a showing that the conditions that make repayment a hardship are unlikely to improve substantially over time. Courts in some circuits will permit the judge to find that the borrower can repay a portion of the loan without hardship, and to discharge the balance of the loan.

To discharge a defaulted student loan in bankruptcy, the debtor must prove in court that repayment constitutes undue hardship.



Get relief outside of bankruptcy

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