.:Student Loans:.

Discharging student loans in bankruptcy is very difficult to do.   Provisions for discharging student loans in bankruptcy were changed in 1998.  The bankruptcy court has to rule that repayment would cause undue hardship for you or your dependents.  Absent a showing of "undue hardship", perhaps the best that bankruptcy can now do with respect to student loans is to eliminate your other debts that compete for your dollars, which hopefully makes payment of your student loan less of a financial burden.

Hardship discharge. Student loans are no longer dischargeable in bankruptcy just because they have been in pay status for a given period of time. The only way the loan can be discharged is by proving that repayment of the loan will create an undue hardship on the debtor/borrower and his family.  This standard is generally interpreted to mean that the debtor cannot maintain a minimally adequate standard of living and repay the loan.  It usually requires a showing that the conditions that make repayment a hardship are unlikely to improve substantially over time.  Many courts use the test for undue hardship found in the Brunner case.  831 F.2d 395 (1987).  To discharge a student loan in bankruptcy, the debtor must bring an adversary proceeding in the bankruptcy case.  The court in the Brunner case used a three-pronged test to determine hardship:

• If you were forced to repay the loan, you would not be able to maintain a minimal standard of living.
• There is evidence that this hardship will continue for a significant portion of the loan repayment period.
• You made good-faith efforts to repay the loan before filing bankruptcy (usually this means you have been in repayment for a minimum of five years).

Federal Student Loans vs. Private Student Loans.  Students loans may be federal or private in nature. Federal student loans are loans that are provided by the federal government. Private student loans, on the other hand, are provided by some source other than the federal government. Federal student loans are not dischargeable unless they meet the requirements for a hardship discharge. A private student loan may likewise be discharged based on hardship, but it may also be discharged if it was not a school certified loan , e.g. because it exceeded allowable loan limits, was used to pay non-allowable expenses or was used at an ineligible educational institution (a non Title IV school). Each private student loan must be evaluated on a case-by-case basis to determine dischargeability.

Living with Student Loans. There is some small comfort in the federal regulations which restrict the amount of a student/borrower's wages that can be garnished to repay a student loan to 10% of the borrower's take home pay. 59 Fed. Reg § 22473.

Chapter 13 and Student Loans. Although you may not eliminate student loans in a Chapter 7 bankruptcy, you can consolidate them with your other bills in a Chapter 13 bankruptcy, and stop collection action against you. Chapter 13 helps you get a handle on the payments by forcing the creditor to accept a reduced repayment plan over a period of three to five years once it is approved by the court. However, you will still owe whatever student loan debt remains when you complete your plan and interest will continue to accrue on your student loan during the term of your Chapter 13 plan.

Non-Bankruptcy Options. Whether or not you are filing bankruptcy, there may be other options to assist you with student loans. See Disability Discharges and Postponement Options.

Disability Discharges. If you are totally and permanently disabled, you may be eligible for cancellation of your student loan by the lender. This type of disability discharge cancels your obligation to repay the balance of your loan. Sallie May is the leading provider of student loans. Click Here to visit the Sallie Mae website and download an application for a disability discharge of your student loan.

Postponement Options (Deferment and Forbearance). If your situation meets specific criteria set by the U.S. Department of Education, you are entitled to a deferment or forbearance of your federal student loan payments for a period of time.Click Here to visit the Vermont Student Assistance Corporation (VSAC) website and download a deferment application.