Can Student Loans Be Discharged in Bankruptcy?


Student loans are not usually dischargeable in chapter 7.

The only way that student loans can be discharged is if it would result in an extreme hardship for the debtor.

What that has come to mean is that the debtor must be completely disabled with no ability to earn an income.

Obviously most people wouldn't be able to meet that condition. Most potential clients seem to grasp this, but what they do not know is that there are other options for dealing with student loans.

Their first option may be to opt for a different repayment plan. You might be able to repay the loan over a longer span of time. There are also income-based repayment plans. So, if your income has dropped, that could be a good option for you. The amount that you repay in an income-based repayment plan is capped based on your income and the number of people in your family, no matter how large your loan is. Such a plan can drastically lower your payments, and sometimes get rid of them altogether. If your payment is not big enough to pay all of the interest, the interest will continue to add up and be added to your loan balance. The "good" news, though, is that if you keep making payments under an income-based plan for 25 years, the rest of the balance is forgiven.

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If your situation is bad enough that you cannot afford to make any payments on your student loans, you may be able to quit making payments altogether for a while. There are 3 ways to do this - forbearance, deferment, or cancellation.

A forbearance is the easiest to get of three options. Fundamentally, a forbearance makes it possible for you to cease making payments for a set amount of time. You can be provided a forbearance for a variety of reasons, including things such as poor health, unforeseen personal problems, or economic difficulties. In most cases, you can choose the amount of time, up to one year. When that time expires, you can also usually re-apply for another forbearance. The downside of a forbearance is that interest will continue to accrue during the forbearance period, so your loan balance will grow.

If you can get one, a deferment is the best option because, not only do you not have to make payments during the deferment period, but no interest compounds during that time. A deferment is harder to qualify for than a forbearance, but there are several different kinds of deferments that can apply, including attending school at least half time, being unemployed (for up to 3 years), economic hardship, serving in the military, temporary total disability of you, your spouse, or dependent (for up to 3 years), and studying in an approved graduate fellowship or rehabilitation program for the disabled.

The hardest option to qualify for, but also the most advantageous if you can qualify is loan cancellation. To cancel a student loan, you'll have to meet very explicit conditions. Some conditions that may qualify you for a cancellation include permanent total disability, service in the United States military, and providing services to needy populations (can cancel a portion of your loans).

Without regard for which option you use,it is important to take some step if you are in danger of defaulting on your student loan. If you default, late fees, collection costs, and interest will quickly increase your amount owed. The lender may also garnish your earnings or attach bank accounts or other property, just like any other creditor could do. However, student loan lenders have even more options available to them that aren't available to other creditors. Student loan lenders can do things like intercept your federal income tax return and even garnish your federal benefits, like Social Security retirement and disability benefits (but not Supplemental Security Income "SSI").


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