Up until 2005, there were many more options for students who decided to declare bankruptcy in order to avoid repayment of their student debt. However, borrower's bankruptcy options on student loans have been cut to very few. Changes in the Bankruptcy Code in late 1998 made most student loans non-dischargeable, which means that even if a student filed for bankruptcy, he/she would retain the loan and have to repay. This is regardless of the age of the loan unless the borrower can prove "substantial hardship".
Hardship means that repayment will create undue hardship the repayment of the loan will create an undue hardship on the debtor/borrower and his family. This is defined as the debtor cannot maintain a minimally adequate standard of living and repay the loan with proof being the conditions are such that repayment and living at the minimum standard are impossible and that this situation is unlikely to improve substantially over time. Many undue hardship cases are compared to the 1987 case argued before the U.S. Supreme of Marie BRUNNER, Appellant, v. the New York State Higher Education Services Corp., Appellee.
There are less drastic methods besides student loan bankruptcy when you run into problems financially. Aside from bankruptcy, a defaulted student loan can be rehabilitated, consolidated, stretched out or discharged if the default is because of disability. If it is not defaulted, then ask for a forbearance or deferment.
If the borrower does reach the "wage garnishment" stage, some small comfort can be taken in the fact that federal regulations limit the amount of the student/borrowers garnishment to 10% of the total amount borrowed. Before reaching that stage, other options are available including contacting various agencies who can offer information on workouts and student loan consolidation programs for loans in trouble, including a program of repayment based on income. Nolo Press and EdFund have information on student loans. Carreon & Associates provides information defaulted loans and Consumer reports provides facts on graduated payments.
While there are many reasons why student loan bankruptcy might seem a viable option, in today's world, it should be the last and not the first resort. In point of fact, the only thing that it will affect in terms of debt reduction and the student loan is that it will reduce the borrowers other debts making it easier to repay the student loan. As a result, unless there is no other option available, student loan bankruptcy is not a good way to go unless all other bills and creditors involved need to be held off. If the sole purpose of filing bankruptcy is to avoid repayment of student loan debt, it is not the correct course of action.
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