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Understanding what happens to student loans in bankruptcy

Whether you're going through a Chapter 13 reorganization and repayment bankruptcy or a Chapter 7 with discharge of your debts, certain debts won't go away. In particular, typically, student loans don't get discharged in bankruptcy. That can be a source of great frustration, especially because student loans are often one of the biggest sources of debt in people's lives. Even in Chapter 13, where debtors try to repay as much as possible over a specific period of time, student loans likely won't get discharged.

Many young people take out tens of thousands of dollars, sometimes well into six figures, in student loans. They do this with the belief that with more education comes better jobs and higher wages. Sadly, that often just isn't the case anymore. Many graduates with Master's or even doctoral degrees may struggle to find work in their career path. This can lead to financial hopelessness, as the student loans continue accumulating interest while you work a mediocre job with an advanced degree.

Why can't student loans get discharged?

There was a time when people going through bankruptcy could kiss school debt goodbye. That period ended when laws changed years ago, after serious lobbying by financial institutions. The upside of these changes was that student loans and financial aid became easier for people to get. The downside is that those who take on student loans may struggle to repay them for years without any real options.

There are certain situations when student loans can be at least reduced or discharged. The most common situation in which student loans get discharged is when they are not associated with a federally approved educational institution. If you attended a for-profit college or trade school, particularly if it has since closed, and they used a private company for student loans, you may be able to discharge them.

What's the process to discharge student loans?

In order to have your student loans discharged or forgiven, you have to go through what is called an adversarial hearing. During bankruptcy, you can file a special request to have a hearing about your student loans. When the hearing comes, you can present information and evidence that repaying your loans would create hardship for you and your dependents.

Hardships could include being unable to maintain a minimum standard of living while repaying your student loans or being completely unable to work due to an acquired condition. If you can demonstrate that you attempted to repay your loans before filing bankruptcy and that the hardship is likely to continue indefinitely, the courts could rule in your favor.

Depending on circumstances, the full loan could get discharged, or part of the balance could get reduced. The courts could also adjust the terms of your loan, such as the repayment schedule or your interest rate.

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