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Bankruptcy and Student Loans: Can They Be Discharged?

Whether you’re filing for chapter 7 or chapter 13, explore bankruptcy and student loans and the only exception when they can be discharged.

California students face a collective student loan debt of $131.2 billion. That averages $34,681 per borrower. For many, this is a financial inconvenience as they start their career and move forward in life. 

For others, it becomes a part of their crushing debt as they struggle to make monthly payments. If this sounds familiar, you may consider filing in bankruptcy court to relieve yourself of the debt. 

Before you seek bankruptcy relief, you need to learn how California courts treat bankruptcy and student loans. This guide will help you determine the best course of action for your financial freedom. 

Understanding Bankruptcy and Student Loans

For many people, filing Chapter 7 bankruptcy can help them get their financial situation in order. But this may not be the case for those who are facing mounting student loan debt. The hard truth is that most student loan debts cannot be discharged. 

While state law outlines Chapter 7 bankruptcy in terms of the assets you can keep, federal bankruptcy laws outline what debts can be discharged. Federal laws control over state law, and they state that student loans are not automatically discharged. 

The Exception to the Rule 

Do not lose all hope just yet. There’is an exception to this rule. A debtor would have to prove there’s an “undue hardship” for them to repay the loan. Because this requires a technical legal argument in front of a judge, it’s best to hire an attorney if you choose this route. 

No set standard defines undue hardship. In the past, courts have determined it to mean that you’re unable to maintain a basic standard of living while repaying the loan. An attorney can help you gather the appropriate financial evidence needed to prove this argument. 

Consider if you can pass these three criteria when deciding if the filing is worth it for you. 

  1. Continuing to repay your student loans will cause you to fall below the minimum standard of living 
  2. Your financial situation is unlikely to change in the future 
  3. You’ve made a good faith effort up to this point to repay the loan. 

Your attorney can help you assess your current situation and if you meet these criteria. 

Discharge Other Debts 

You can steal ease your financial obligations without discharged student loans. You can have your credit card, medical, and other debt discharged. This will enable you to make larger payments to your student loans. 

Student Loan Modification 

Another option is to file for bankruptcy under Chapter 13. You and your attorney will work out a payment plan with your creditors. This will include things like reducing interest rates, extending repayment periods, or lowering the principal owed. 

Your personal advocate attorney can work with your student loan lender outside of bankruptcy court to modify your agreement. Most lenders will work with you to receive at least some return on the outstanding balance. 

Have Your Student Loans Forgiven 

If you feel as though you’re drowning in debt, filing for bankruptcy can be an attractive option, but you need to consider the type of debt you owe. When it comes to bankruptcy and student loans, you can’t always get relief. 

Speaking with an attorney can help you determine if Chapter 7 or Chapter 13 is the best course of action for your financial freedom. 

Contact one of our personal advocate attorneys at McFarlin LLP today to discuss the best options for your debt elimination case and find relief for your student loan debt. For a free consultation, call 949-544-2640 now!