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Will bankruptcy affect my student loans?

For people who are not able to pay all of their bills, bankruptcy can provide a way to get a fresh financial start. A large number of Americans have enrolled in higher education and the student loans they have had to take out in order to pay for their education can take up the vast majority of their income. This can be especially true once they have to begin making student loan payments. In situations like these, one might wonder if bankruptcy will provide relief from student loan debt as it would other forms of debts.

While student loans can be discharged, the process of achieving this discharge is rarely easy and usually only comes as a result of a particular set of circumstances. The most common reason student loans are discharged is because they impose an undue hardship on the borrower and their dependents.

Undue hardship

What qualifies as undue hardship is really up to the court of appeals that is handling the particular case, but the majority of courts use what is known as the Brunner test to determine if a borrower's loans are imposing undue hardship.

The Brunner test is composed of three basic criteria.

1) The debtor cannot maintain a minimal standard of living for themselves and their dependants with their current income and expenses.

2) Their current financial situation appears as though it will continue throughout the course of their repayment.

3) The debtor has made a good effort to repay all loans that they took out.

If the court evaluates your situation with the Brunner test and they determine that the loan repayment is causing undue hardship, your loans will be cancelled and you will no longer be responsible for their repayment. However, if the court determines that you do not meet the criteria for undue hardship, you may still want to consider reorganizing your debt through Chapter 13 bankruptcy.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy is generally known as debt reorganization. In most cases, you would submit a payment plan to your creditors based on your current income and what you foresee your future income being. Eventually, the court will determine payment sizes, not your creditors. This may allow you to catch up on secured debts without having to worry about creditors taking legal actions against you.

These plans normally run for 3 to 5 years and you will still owe the remainder of your student loan repayments when the plan is up. Even so, these plans often provide debtors the opportunity to make their loan repayment more manageable. If you think you may be suffering undue hardship or you are considering formulating a repayment plan, you may want to consider seeking out the services of a legal professional who is familiar with this area of the law.

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