What happens to student loans when bankruptcy is filed?

What are student loans?

Student loans are loans granted to students for the specific purpose of financing a university or college education.  The loans are usually given by the federal or state government but there are other private corporations that extend loans to students. These loans usually have low interest rates and students do not have to repay them while they are still studying.

Sometimes, after a student finishes a college or university degree, he cannot immediately find a stable job.  It is after a student graduates that most student loans become due and payable.  When the student fails to pay these student loans or when he fails to make payments on time, he will be sued for repayment of the loan.

Why cannot student loans be discharged in bankruptcy?

Federal and state educational loans, as well as loans from private corporations will have to be paid even if a student files a petition in bankruptcy. This is because the funds set aside for educational loans partake of the nature of public funds.  They must be returned and repaid so that the funds can help finance other students’ university or college education.  For this reason, student loans are not usually discharged in bankruptcy.

A discharge is an order from the bankruptcy court declaring that the debts owed by the debtor no longer need to be paid as the debtor has no sufficient money or property with which to pay off his debts. From the time of the issuance of the order of discharge, the creditors can no longer sue the debtor to collect on the loans, except student loans – these are not usually discharged in bankruptcy.

When can student loans be discharged?

There is an exception to the rule that student loans are not discharged in bankruptcy.  The debtor has to present evidence that if he is made to pay the student loans, this will result in undue hardship and poverty on him and on his family.  For instance, if the debtor has a child who is seriously ill or severely disabled, the debtor’s income is used up for living expenses and medical bills.  If he is required to pay student loans, there will be no money left over to pay for the child’s medical and health needs.

He will also have to prove that his inability to pay the loan persists in the long-term.  His inability to pay must not be temporary but it must persist.  He also has to prove that he has made payments in good faith.  This means that the student started paying the student loans but his lack of sufficient income prevented him from repaying the entire loan.

In order to prove these circumstances, the debtor will need the advice, assistance and representation of a competent and experienced New York Bankruptcy Attorney. We at the Maxwell Law Firm PLLC, assist in client debt settlement, foreclosure defense, tax collection defense, filing for Chapter 7 and 13 bankruptcy, and mortgage home loan modifications. Contact us and speak to our competent and experienced New York Bankruptcy Attorney so that you can get the debt relief you are seeking. Please give us a call at 718-701-0095 to discuss your options.