How can a Chapter 7 Bankruptcy Help with my Student Loans?

Most people who are dealing with debt problems and need a solution to their financial crisis are not considering filing a bankruptcy case because they want to escape their debts.  Most people who file bankruptcy do so because they have experienced a financial crisis that is beyond their control such as the loss of a job, a medical emergency or the loss of a spouse.  Even if the debt problem is due to a lack of proper financial management, those who file bankruptcy often do so as a last resort to solving their debt problems.

student loans

As you may already know, student loans are one of the few unsecured debts that are non-dischargeable in bankruptcy.  Although a few exceptions may apply, when you file for bankruptcy relief under any chapter of the U. S. Bankruptcy Code, you will not be entitled to discharge (erase) your student loan debt.  As with most taxes, child support and alimony, Congress felt that student loan debt should not be dischargeable through the filing of a bankruptcy case.  Therefore, you may be wondering how filing a Chapter 7 bankruptcy case could help you with your student loan problems.

Below are two examples of how filing a Chapter 7 bankruptcy case can help you with your student loan debt.  In both cases, the debtor should seek the advice of an experienced bankruptcy attorney rather than attempting to file the bankruptcy case on his own.  The simple reason is that bankruptcy law is complex and to gain a favorable outcome you should have someone in your corner that represents your interests and can advise you of the best steps to take to resolve your debt issues.


Filing a Chapter 7 bankruptcy to discharge unsecured debts

When a debtor files for relief under Chapter 7 of the Bankruptcy Code, he is entitled to discharge his unsecured debts provided that he meets the requirements to file a Chapter 7 case and completes all of the steps necessary to receive a bankruptcy discharge.  This is particularly helpful for debtors who have a large amount of unsecured debt in addition to their student loans.  Medical bills, credit cards, personal loans and other unsecured debts can be discharged or wiped away in a Chapter 7 bankruptcy.  Because the debtor is no longer legally responsible for the repayment of this unsecured debt, he has more income available to apply to his student loan payments.  Once the bankruptcy discharge is granted, the Chapter 7 bankruptcy case gives the debtor a fresh start with only secured debts and his student loans to pay.  Many debtors find that they are able to pay their student loan payments once their other unsecured debts are discharged by bankruptcy.


Discharge of student loans through a Chapter 7 bankruptcy

Although rare,  there are instances where a debtor may be able to discharge his student loans through a Chapter 7 bankruptcy.  This is why you need an experienced bankruptcy attorney, as some attorneys do not understand that it is possible, in some cases, to wipe out student loans through bankruptcy.  The process to discharge student loans through bankruptcy sounds simple but it takes an experienced bankruptcy lawyer to take a debtor through the steps to discharge student loans in bankruptcy.

discharge student loan

Under current bankruptcy law, a debtor is eligible to discharge student loans in Chapter 7 if he can prove to the court that repaying the student loans will cause him an undue hardship.  The bankruptcy court uses a three-part test to determine if the debtor has met the “undue hardship” burden to discharge student loan debt.

  1. The court will first examine the debtor’s current income to determine if the debtor has sufficient income to pay the student loans without causing an undue hardship.  The debtor must demonstrate that his current income and expenses do not allow him to maintain a minimal standard of living for him and his dependants if he is required to pay his student loans.
  2. There must be sufficient evidence or other circumstances that indicate the debtor’s current financial state will continue for a significant portion of the repayment period for his student loans.
  3. There must have been a good faith effort on the part of the debtor to repay his student loans.  This usually requires that the debtor has made the minimum payments on his student loans for at least five years prior to the filing of the bankruptcy.  This is not a set standard but has been used by many bankruptcy judges in determining if the debtor has met the “good faith effort” requirement to discharge his student loans.

Debtors who are able to meet all of the above requirements may be able to discharge their student loans through a Chapter 7 bankruptcy.  This releases a heavy burden of debt and allows the debtor to recover from a financial crisis and begin to rebuild his finances for a stronger financial future.  An experienced bankruptcy attorney can help you determine if filing a Chapter 7 is the best solution to solve your problem with student loans.