Do you presently have federal student loan debt hanging over your head? If you’re already having a cash flow problem that’s affecting other debts, you could be wondering, “Can federal student loan debt be discharged in a Chapter 7 or 13 bankruptcy?” This is a very good question and we assure you, it comes up a lot.
The answer is – it depends. It is possible to discharge federal student loan debt in Chapter 7 and 13 bankruptcies, but it’s not guaranteed. It depends on the facts of your case. Debtors can only discharge federal student loan debt when they file separate actions called “adversary proceedings.”
Debtors file adversary proceedings with the bankruptcy court and while doing so, they ask the court to find that repaying the student loan debt would impose “undue hardship” on the debtor and his or her dependents. If you decide to do this, be aware that your creditors may be present to challenge your request.
How is Undue Hardship Determined?
Believe it or not, the federal bankruptcy courts do not have a single test that they use to determine “undue hardship,” but as a rule, the courts look at the following types of factors when determining if a debtor repaying their federal student loan debt would cause undue hardship on their family:
- If the debtor is forced to repay the loan, he or she would be unable to maintain a minimum standard of living.
- If there is sufficient evidence the debtor would experience undue hardship for most, if not all of the loan repayment period.
- If the debtor made a good faith effort to pay on the loan before he or she filed for bankruptcy relief.
“What will happen to my loan if the bankruptcy court decides that paying the loan would cause undue hardship?” It depends on the bankruptcy court’s decision about your case, but one of the following three things would happen:
- You could have to repay the loan, but with a lower interest rate and easier terms.
- Your loan can be partially discharged and you could have to repay part of the loan.
- The entire loan may be discharged and you won’t have to pay any of the loan back. In this case, all collection activity would cease.