The Difficulty of Eliminating Student Loan Debt via Bankruptcy

As the cost of college tuitions and related costs have soared over the last twenty years, about 1 out of 4 former students find themselves refraining from paying back their student loans at various times over the course of their loan repayment period. The prospect of getting out from under that particular kind of debt by filing for bankruptcy protection may clearly seem like an attractive option. But student loan debtholders need to be careful. Filing bankruptcy, whether it is a Chapter 7 liquidation or a Chapter 13 reorganization, may not necessarily solve the problems of the student loan debt.

This is because student loan debt is not automatically subject to discharge in bankruptcy. The basic manner in which bankruptcies operate is that a debtor files bankruptcy to reduce or fully eliminate some debts which are owed by the filer. After the commencement of the bankruptcy case, whether it is a Chapter 7 or a Chapter 13 bankruptcy action, the debtor will be required to provide a listing or schedule of all outstanding debts.  Many of the debts – those which creditors refer to as “unsecured claims” – will be almost completely wiped out. The secured claims will be paid back to a very high extent, often depending on the value of the collateral securing the debt. When each of these types of claims is discharged by the bankruptcy court, the debtor will no longer bear any further responsibility for them.

But with regard to student loan debt, it is not so easy to obtain such a discharge. The law requires that the debtor demonstrate that “undue hardship” prevents the payment of this student loan arrearage. Many courts require that the type of “undue hardship” which must be shown goes beyond the hardship caused merely by the size of the student loan obligation and must reflect overall financial difficulty caused by all debts as well as insufficient income. While this standard can – and often does –get met by debtors in bankruptcies cases, there are no definite guarantees.

Hence, if your problems with paying back student loan debt are prompting a consideration of filing for bankruptcy protection, it is strongly advisable that you consult with a local bankruptcy attorney to discuss your options before making a rash decision.

In Albuquerque, Giddens & Gatton Law, P.C. has bankruptcy attorneys who offer expert handling of Chapter 7, Chapter 11, Chapter 12 and Chapter 13 bankruptcy cases in New Mexico. The firm represents many debtors and creditors in Albuquerque, Santa Fe, Taos, Raton, Farmington, Gallup, Grants, Roswell, Los Lunas, Placitas, Belen and the rest of New Mexico. Contact Giddens & Gatton Law, P.C. at (505) 633-6298 to set up an appointment with one of its New Mexico bankruptcy lawyers or visit the firm’s website at Giddens & Gatton Law, P.C. is located at 10400 Academy Road N.E., Suite 350 in Albuquerque, New Mexico.