In our previous post, we began discussing the difficulty many students are facing coming out of school, and particularly the burden of student loans. Private loans, in particular, can be a burden to students. According to Lauren Asher of the Institute for College Access and Success, "private student loans are much more like a credit card or sub-prime mortgage [in that] they tend to have variable rates and they have no consumer protections."

On top of that, many graduates make no more after receiving their education than they would have forgone higher education. Unfortunately, student loans cannot always be discharged in bankruptcy, unlike a mortgage or credit card debt.

While student loans used to be dischargeable by bankruptcy in a variety of circumstances, they are generally quite difficult to discharge in bankruptcy anymore. In order to get them discharged, the filer needs to show that repayment would impose an "undue hardship" on the filer and any dependants. Court use different tests to determine whether a borrower can show an undue burden. Some are more flexible than others.

If a filer is able to prove undue hardship, their student loan will be cancelled and they will be protected from collection actions on all debts. If unsuccessful, they will still have the option to repay the loans though a Chapter 13 bankruptcy plan. In that approach, the court will determine the size of the student loan payments. After the three to five year bankruptcy period is up, the filer will have to opportunity to have the remainder of their loans discharged based on undue hardship.

Individuals who are struggling to repay student loans and other debt should consult an attorney to determine their options. An experienced attorney will help get all the options out on the table so that the best decision can be made.

Source: CBS News, "Declaring bankruptcy doesn't ease student loans," John Blackstone, 31 July 2011.

Tags: student loans, bankruptcy