Many people who feel overwhelmed by their financial obligations look to bankruptcy as a possible solution. However, filing for bankruptcy unfortunately does not solve every kind of debt problem. In most cases, bankruptcy and student loans simply do not mix.
In order to better understand why the student loans are not normally discharged in bankruptcy, it helps to know a little bit about the student loan industry. In order to encourage lenders to give loans as much as possible without fear of losing their investments, Congress made it very difficult for people to wipe out their student loans in bankruptcy court.
In order to have your student loans eliminated in Chapter 7, you have to prove that you are suffering from a severe hardship and that you have made the best effort possible to pay off these loans. You have to demonstrate your situation is so severe that you and your family could not survive (or at least maintain a minimum standard of living) if you had to pay the monthly student loan payments.
Your hardship cannot be short-term, either. The court wants to see that your hardship (such as unemployment, disability, or other serious and long-term problems) is likely to continue in the foreseeable future. You also have to demonstrate that you have done your best to pay off these obligations and are not simply trying to avoid your responsibilities by declaring Chapter 7.
Unfortunately, the situation becomes more complicated when you consider that each bankruptcy judge will have his or her own interpretation of various aspects of the statutes. Ultimately, much of these requirements are subjective, and it will be up to the judge to decide whether you really have acted in good faith and whether your economic situation is severe enough to warrant the dismissal of your loans.
If student loans are the main reason you’re considering bankruptcy, then you may want to consider other options such as contacting the lender and requesting a deferment or forbearance until you get back on your feet. Of course, if your situation is severe enough, you may get these loans eliminated anyway. Some federal bankruptcy judges have even taken the liberty of postponing collection efforts or reducing the total amount owed on the loan.