In the unfortunate circumstance in which a person must file for bankruptcy, different things could happen to student loans. There is the slim possibility that a student loan could be discharged, but this is not always the case.
To begin, there are two types of bankruptcy in which student loans may become part of the equation. The most common type of bankruptcy is “chapter 7.” Basically, this is a liquidation bankruptcy, which means the trustee sells off all non-exempt assets held by the debtor so that the debts can be repaid. A “chapter 13” bankruptcy allows individuals to develop a plan to repay all or part of their debts. The law forbids creditors from starting or continuing collection efforts at this time.
So how are student loans affected during a chapter 7 or chapter 13 bankruptcy? First of all, an automatic stay is begun while the bankruptcy is under way. The stay prevents creditors from starting or continuing administrative wage garnishment. Collection efforts may only continue after the stay has been terminated. A loan may be completely discharged only if the individual faces undue financial hardship during the pursuit of repaying such loans. A judge will only allow undue hardship to erase a student loan if the debtor cannot maintain a minimal standard of living while repaying the student loans. This is actually very hard to prove, and happens only rarely. A person should never count on his or her loans being discharged due to bankruptcy, as undue financial hardship is exceedingly difficult to prove.
Student loan repayments are still due during a chapter 13 bankruptcy is filed, provided the automatic stay has been lifted. Federal loans will be removed from repayment status during the length of a chapter 13 bankruptcy. However, if the debtor does not repay these loans during the time frame, the loan could go into default. This adds up to some very serious consequences. An administrative wage garnishment is almost sure to ensue after a loan is defaulted. In this circumstance, the bankruptcy does not stop the wage garnishment, and it only hurts the debtor in the long run.
As can be seen, bankruptcy is definitely not the best option to stop student loan wage garnishment, or to discharge the student loans altogether. Only under very rare circumstances can a student loan be discharged or forgiven due to a bankruptcy. There are many other options, however, for a debtor to use. Forgiveness, repayment plans, and debt relief are only a few of the ways student loan debt can be reduced and administrative wage garnishments stopped. Check out other articles on this website for more help concerning student loan debt relief.