Does Chapter 7 Cover Student Loans?

By Elizabeth Stock

If you are overwhelmed by student loan debt, you may consider filing for bankruptcy. There are two different types of student loans: private and federal loans. Federal student loans are backed by the federal government and offer a fixed interest rate. Banks and other financials institutions issue private loans, and interest rates on these loans are typically much higher than federal loans. While filing for bankruptcy may seem like a good option, it can be very difficult to discharge your student loan debt in bankruptcy and will require a showing that the student loan constitutes an undue burden.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy is a liquidation proceeding that involves selling your assets to repay your creditors. The bankruptcy trustee assigned to your case will determine what assets are eligible for seizure, sell those assets and distribute the funds to your creditors in order of their priority, as determined by the type of debt. In a Chapter 7 bankruptcy, several forms of debt are eligible for a bankruptcy discharge, including credit card debt, personal loans and legal judgments. However, some debts are not eligible for a bankruptcy discharge, including family support obligations and student loans. Once the Chapter 7 bankruptcy is complete, all eligible debt is discharged.

Bankruptcy Legislation

In 2005, Congress passed an amendment to the Bankruptcy Code that changed the dischargeability of student loans in a bankruptcy proceeding. Referred to as BAPCPA, the amendment was passed in response to perceived abuse of the bankruptcy system and includes other restrictions on debtors in addition to the change related to student loans. Prior to 2005, private loans were dischargeable in bankruptcy. The 2005 amendment changed the definition of student loans to include all loans, regardless of whether the loan was a private or federally funded loan.

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Undue Hardship

To have your student loans discharged in your bankruptcy case, you must prove to the court that the loans constitute an undue hardship. The court considers three things when determining undue hardship. First, you must show that you cannot maintain a minimal standard of living if you must repay your student loans. Second, you must prove to the court that your current financial situation, including your income and expenses, will likely continue into the future. Third, the court must be satisfied that you have made a good faith effort to repay your student loans thus far. Whether your student loans are an undue hardship is determined at a special hearing before the bankruptcy judge. A finding of undue hardship is rare, but the court may find undue hardship if you have a disability that prevents you from working and repaying your loans. A court is more likely to be sympathetic to your undue hardship argument if you have made efforts to consolidate your loans or discussed compromise payments with your lender.

Filing Chapter 13 Bankruptcy

In contrast to Chapter 7 bankruptcy, filing for Chapter 13 bankruptcy allows you to keep your property while you make monthly payments toward a repayment plan. Repayment plans last anywhere from three to five years. Filing for Chapter 13 bankruptcy allows you to catch up on your debt and may be beneficial to you if you are having a hard time affording your student loan payments. In a Chapter 13 bankruptcy, your monthly student loan payments may be less than they are now and your repayment plan, not your lender, determines how much you pay each month. In addition, depending on the judge hearing your case, you may be able to prioritize your student loan debt in your repayment plan, allowing you to pay more money toward your student loans than your other debt each month. At the end of your Chapter 13 plan, you will still owe the remainder of the student loan; however, you may be better able to show the court how the loan constitutes an undue hardship.

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