When facing a severe financial crisis, many people turn to bankruptcy as a way to wipe out their debts and experience a new financial beginning. This is certainly an option that you should consider, but you should discuss this carefully with your lawyer to determine if this is the best option for you. One important consideration is what actual debts you wish to be wiped out. Declaring bankruptcy on student loans, for example, is not usually allowed.
In fact, certain kinds of financial obligations are not normally discharged (which means eliminated) during a bankruptcy proceeding. For example, if you owe child support or have been forced to pay some sort of criminal fee, these kinds of items will probably not be eliminated during bankruptcy. Whether we like it or not, student loans fall into this category, and they are not normally eliminated.
It’s actually not difficult to understand why student loans typically survive bankruptcy. The laws were written this way in order to encourage banks to make loans to students. If banks believe that their loans could be wiped out easily, they might not make the loans at all.
This is why getting rid of your student loan obligations is tricky in most bankruptcy cases. In order to have a chance of doing away with your student loans when filing for bankruptcy, you have to show the court that you are experiencing an undue hardship. In other words, the question is whether you would be able to maintain a minimum standard of living if you are forced to pay back the student loans.
The bottom line is that you have to be in severe financial circumstances for the judge to consider wiping out your student debt. Unfortunately, this criterion is quite vague and can be interpreted differently by different judges.
The law is not crystal clear on this matter, which can be a blessing or a curse depending on how your judge views your case. Judges also expect you to prove that you have made reasonable efforts to pay back their loans, and that your situation is unlikely to improve (such as because of an illness or injury).
If you are unable to get rid of your student loans with bankruptcy, you may want to look into the possibility of an administrative discharge. The chances of qualifying are still steep, but it’s worth looking into.
Administrative discharge will do away with your student loans in certain cases such as severe disability or if you have served in the military or peace corps.
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