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Student Loans and Bankruptcy

Student loans comprise the bulk of many people’s debts. It is not unusual for college graduates to have tens of thousands of dollars in student loan debt, particularly if they are attending graduate school. However, like taxes, federally-guaranteed student loans may not be discharged by bankruptcy. While bankruptcy does not usually discharge student loan debt, there can be exceptions to this rule. It is important to talk to a knowledgeable bankruptcy attorney about your options in discharging your debt through bankruptcy.

Student Loan Debt and Bankruptcy

In order to discharge a student loan through bankruptcy, you must show that payment of this debt will impose an “undue hardship” on you and your dependents. The courts use a variety of tests to determine if this is true. The Brunner test is one of the most common. It requires the debtor to show that he or she cannot maintain a “minimal” standard of living if forced to repay the loans; that this state of affairs is likely to continue for a significant portion of the repayment period; and that the debtor has made a good faith effort to repay these loans. If you are successfully able to show hardship, your student loans may be cancelled in their entirety.

Can Bankruptcy Help?

One thing that bankruptcy will do for you is to put an automatic stay on all collection efforts against you, including those from student loan administrators. While you may still have to repay the debt if you are not able to show sufficient financial hardship, what you will gain is some “breathing room.” You may also be able to discharge other debts such as credit card debt, making more room in your budget for student loan payments. Finally, bankruptcy can be used as evidence of reduced income or other financial stress that can help you renegotiate the term and amount of your student loan payments. A Chapter 13 plan may be able to help you manage your student loan and other payments, while a Chapter 7 plan may discharge most or all of your other debt. In order to successfully use either of these strategies to reduce or eliminate your debt, you may wish to secure the help of an experienced bankruptcy attorney. The attorneys at the Oswalt Law Group in Phoenix are ready to help. Contact us today for a consultation about your bankruptcy case.  

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