Student Loans and Bankruptcy

Student loans are the most common way Utahans use to fund an education, specifically college and graduate school.  They can also provide educational opportunities that you may otherwise not have been able to obtain due to the cost. Sadly in many of the Utah cases that I see college grads are left with a diploma and the crushing financial burden of both credit card and student loan debt – and may times there is no job in sight.

The experts suggest the student loan debt is a real problem – bigger than the recent housing bubble and collapse. The latest statistics show  Americans are burdened by huge amount of student loan debt and now owe almost $1.2 trillion dollars in student loans.

As more and more people find themselves attending college and postgraduate programs they are using student loans in order to fund their continuing education.  This is certainly true here in Utah.  Receiving a federal student loans requires that a borrower sign a promissory note. This note – one that can also sometimes require a cosigner – is an agreement to pay back the loan in full and with interest and failing to do so can lead to legal issues.  If you cant pay the student loan collectors come a knocking.

Students who are unable to overcome their financial hardships may seek relief through bankruptcy. Filing for Chapter 7 bankruptcy provides you with the promise of settling debts and starting anew. However, student loan debt only further complicates the bankruptcy process for hopeful filers. This is because student loan debt, especially those owed to the federal government, are much more difficult to discharge through the bankruptcy. Discharging federally-funded student loan debt is not impossible in every situation. A borrower may be able to discharge his or her debt if he or she demonstrates to the bankruptcy court that the specific loan(s) have created an “undue financial hardship.”  Since congress did not tell us what undue financial hardship means proving it can be tough.  Although recently some bankruptcy courts have been more willing to grant relief based on this concept but it not all that common.  So it is important to note that this outcome is rare, though an experienced bankruptcy attorney can identify when you may qualify for a hardship discharge. Private student loan debt is usually managed by an independent organization. These private student loans are the result of what is typically an agreement entered between two private parties. Because of this privately funded loans may provide a greater opportunity to be discharged in a Chapter 7 bankruptcy filing.

Filing for Chapter 7 bankruptcy is both a stressful and complex decision.  When student loan debt is involved, the process can becomes even more complex. As case law and rules regarding the dischargeability of student loan debt continue to change, it becomes very important to seek the advice and counsel of a experience bankruptcy attorney. Even if you cannot discharge your student loans a bankruptcy still may free up some of your income to manage the student loan payments more easily in the future.