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Student loans and the hardship factor in personal bankruptcy

In today's tough economic times more and more people are struggling to pay their student loans and don't know where to turn for help. Although it can be difficult to discharge student loans in a personal bankruptcy it is not altogether impossible. Prior to late 1998, federal bankruptcy law allowed for the discharge of student loans in a Chapter 7 bankruptcy however, the loans had to have been in a pay status for seven years before eligibility was even considered. Now an undue hardship must be demonstrated for student loans to qualify for a bankruptcy discharge.

So if you are like many Coloradoans you might be wondering what exactly the requirements are for meeting the "undue hardship" criteria. The burden was set in Bruner v. NY State Higher Education Services in 1987, which defined three rather strict legal requirements. The first requirement is the debtor must not be able to maintain a minimal standard of living based on his or her current income and expenses if forced to repay the student loans. Dependents are included in this calculation.

A minimal standard of living means your financial problems cannot be temporary, such as a recent job loss or temporary income reduction. Second, the debtor must prove the circumstances that exist must continue to exist throughout the majority of the student loan's repayment period. An example might be a recent permanent disability that prevents the debtor from obtaining work in order to repay some or all of the student loans.

Lastly, the debtor must show a good faith effort to repay the loans. The debtor must demonstrate a good faith effort by seriously attempting to find gainful employment, maximize his or her income and minimize expenses.
The good news is that a personal bankruptcy may provide debt relief to a point where making payments on your student loans might be more feasible by discharging other non-secure debts, such as credit cards and medical bills. By consulting with a personal bankruptcy attorney in your state you can learn what options are available to you in your specific circumstances.

Source: The Miami Herald, "Bankruptcy doesn't mean student loans are canceled," Martin E. Segal, July 15, 2012

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