Student Loans and Bankruptcy Rarely Mix

Bankruptcy can be used as a last-resort method for clearing overly burdensome debts. However, many people have debts that include many student loans, and bankruptcy is not usually the best course of action in these circumstances. In almost all cases, student loans will not be cleared when bankruptcy is filed, so alternate arrangements must be made.

Several things are not dischargeable in bankruptcy filings, including child support payments and student loans. In these cases, one must prove that the debts cause an “undue hardship.” Undue hardship is usually tested by seeing if the debt causes the debtor to be unable to meet a minimum standard of living, if the situation seems like it will continue for an extended period of time, and the debtor has made an effort to clear the debts. All of these conditions must be true for a court to clear student loans in bankruptcy filings, and as a result, it is very rare for them to do so.

However, there are other options for clearing student debts. The best method is always paying off the debts. Neither lenders nor borrowers profit when someone files bankruptcy, so both sides would like to see an arrangement worked out so that the debts can be paid off. Therefore, it is worth a try to call the lender to see if the two parties can work out a payment plan that will allow the debtor to pay off the loan without it causing too much strain on his or her budget. Similarly, some Chapter 13 bankruptcy processes allow for student loan reorganization. Chapter 13 bankruptcy allows the debtor to create a plan to pay off the debts over time. Sometimes, it is possible to prioritize the student loans so they are paid off first.

Filing for bankruptcy is an important decision, and if the debt is primarily student loans, it may not be the best option. In any case, it is important to talk to a bankruptcy attorney to figure out the best course of action. Though they can be hard to discharge, fortunately, there are more options for dealing with student loans.

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Graham Billings

Graham Billings is a senior at the University of North Carolina at Chapel Hill with a double major in Economics and Political Science. He plans to graduate in December of 2009 and then attend law school in the fall of 2010. He is a member of the Economics Club at Carolina, which brings in speakers and hosts events in order to discuss current economic issues and help those who do not have a background in economics become more familiar with it. He is a National Merit Scholar and Dean’s List recipient. He is originally from Greensboro, North Carolina and attended the Early College at Guilford for high school, taking classes at Guilford College. In addition to economics, his academic interests include the legal and political system. He headed the only student-run, high school-level Honor Court in high school and participated in a national model Congress in San Francisco, run by Harvard students, and won awards of excellence for his work on the mock Supreme Court. Additionally, he tutors Carolina students in economics on a volunteer basis.

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