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What Happens to Your Student Loans When You File for Bankruptcy?

graduation cap sitting on top of a pile of $20 bills


By:Mike Cibik


When we reach a point in our financial lives where bankruptcy seems like the only way out, it is important to consider the ramifications of such a decision. Specifically, as a graduate student, you may be overwhelmed with debt and may be considering the possibility of filing for bankruptcy in an effort to get a fresh start, debt free. It is important to contact a bankruptcy attorney immediately to discuss every possible option if you are a student who plans to file for bankruptcy.

Bankruptcy attorneys are tentative to take cases involving individuals who are looking file for bankruptcy in an effort to eliminate their student loans because this is an uphill battle and is cost prohibitive for an attorney who needs to get paid. But, understanding bankruptcy, can only be achieved through bankruptcy lawyers who understand what will happen to student loans after you file for bankruptcy. The easiest way to understand bankruptcy and student loans is to look at the two types of bankruptcy you may file.


Chapter 7

Chapter 7 bankruptcy results in the liquidations of your assets and does not require any type of repayment plan. Some of your debts will be fully discharged but the real question is, will student loan debt be discharged. Unfortunately, Chapter 7 bankruptcy does not automatically discharge your debt from student loans, but the filed may file a Complaint to Determine Dischargeability to initiate an adversary proceeding. Under this process, you will likely have very little to contribute toward the repayment of your debts and this showing of extreme financial hardship may lead the courts to discharge your student loan debt entirely.


This process is not full-proof; a study published in 2011 found that 40 percent of those who initiated the Complaint to Determine Dischargeability were able to discharge a portion or all of their student loan debt. If the court finds that you do in fact have “undue hardship”, your student loan debt will be forgiven in some capacity. Although this process is challenging and not always favorable to the filer, you should take advantage of this legal proceeding to have your student loan debt forgiven when filing under Chapter 7; do not just think that students cannot declare bankruptcy because they can.  


Chapter 13

If you choose to file under a Chapter 13 Bankruptcy, you will go through a reorganization of debt where no debts are discharged. Instead, a repayment plan is developed to help pay back a portion of your debts, in which your student loans may be included. No payments will be so pursuant to the promissory note of the bankruptcy proceedings which is good. Unfortunately, nothing really happens to the student loan debt because of the Higher Education Act. Under this Act, all collection activity must be stopped (no monthly statements, no phone calls, and no payments due). Again, once bankruptcy ends, the payments become due and your student loan debt remains.


Private Student Loans and Bankruptcy

Many college students have needed to borrow money from private lenders in order to finance their living and tuition expenses. These loans typically carry higher interest rates and often carry a bankruptcy default provision. Meaning, if you (the borrower) file for bankruptcy, the private student loan defaults. You may be asking, am I breaking the law by defaulting on a loan under bankruptcy? Fortunately, at this time there is no case law regarding private student loans under default. It is important to contact bankruptcy lawyers to discuss the “ipso facto clause” that causes default upon filing for bankruptcy with private debt.


Should you have any questions or potentially believe that your student loans are overwhelming and leading towards bankruptcy, please contact the Cibik & Cataldo team at (215) 735-1060 for a free consultation.


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