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Are All Student Loans Treated the Same in Bankruptcy?

| June 10, 2015

Graduating from college can be an overwhelming time in anyone’s life. You’ve reached a major milestone — earning your degree. But even as you celebrate your achievement, worry lurks. Will you be able to support yourself? Will you be able to handle your student loan payments and other bills?

Student loan debt in the United States has reached an all-time high, surpassing the total amount of credit card debt for the first time ever in 2010. By 2011, student loan debt passed the $1 trillion mark, notes.

In 2012, the average student’s debt burden for college loans stood at $27,000, a staggering amount for someone just starting out in life and with potentially shaky employment prospects. Job opportunities for recent graduates have dwindled at the same time that the cost of college has increased significantly. You may be left wondering what will happen with your student loans if you need to file bankruptcy later in life.

Types of Student Loans

Student loans fall into two major categories: federal and private. Federal loans are by far the most popular, constituting about 80 percent of the total student loan debt in the United States. However, federal loans are capped; after reaching the limit, some students also take out private loans.

Nearly half of students attending for-profit colleges hold private loans, whereas only about 14 percent of students at public colleges and universities have them.

Can You Discharge Your Loans?

Very few student loans — either private or federal — are dischargeable in bankruptcy. When a bankruptcy court rules that student loans can be discharged, it’s nearly always due to the particular circumstances of the individual filing bankruptcy.

For young people having trouble paying just about any other type of debt — including car loans, credit cards debt and even gambling debt — bankruptcy is an option, notes Time. But with student loans, recent graduates typically are on their own. The law is complex, however, and no two situations are the same. Anyone struggling with student loan debt should contact a knowledgeable bankruptcy law firm such as Morgan & Morgan — Athens lawyers serving the University of Georgia community.

It is possible to discharge student loans, but you almost always must prove “undue hardship,” which involves initiating a separate action in a bankruptcy case. Undue hardship is a vague term typically open to interpretation by a specific court, but it usually includes meeting several criteria:

  • Continued attempts to pay the debt over a long period of time.
  • Inability to maintain even a very low standard of living while paying the debt.
  • A “good-faith” effort to repay the debt.

Even if your student loans can’t be discharged, bankruptcy still may be the best option in your individual situation. For a personal consultation,contact Athens lawyers, Morgan & Morgan.

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