Can you file bankruptcy on a student loan?

Reader Question: Daniel from Wisconsin asks: “Can you file bankruptcy on a student loan?”

School is hard. Paying for school is harder. In the National Postsecondary Student Aid Study (NPSAS) conducted by the U.S. Department of Education, 67% of students graduating from four-year colleges and universities had student loan debt, which represents 1.4 million students graduating with debt. This number has increased 27%, from 1.1 million students in 2004. Student loans for non accredited schools often come with less than desirable loan terms because they are harder to obtain, so it’s not unusual for many students to end up in hot water financially once they begin paying loans like this back. However, financial hardship can result from any type of student loan.

The Stafford Loan is the main federal student loan. There are two types of Stafford Loans, the Federal Family Education Loan Program (FFELP) and the Federal Direct Student Loan Program (FDSLP). Private or alternative loans are alternatives for students whose needs are not met by the federal programs.

You can file bankruptcy on a student loan. However, student loans are NOT usually discharged. According to Chapter 7 Bankruptcy law, you must show that payment of debt will “impose an undue hardship on you and your dependents” for your loan to be discharged. There are several different tests Courts use to evaluate whether or not the borrower has an undue hardship.

Your student loan will be cancelled if you can successfully prove this hardship. By filing bankruptcy on a student loan, you are also protected from collection actions on your debts until the case can be resolved. Make sure you talk with a lawyer before filing bankruptcy on a student loan. If you cannot prove this hardship, consult a bankruptcy lawyer. Your lawyer knows the law and may be able to provide other alternatives.

If you decide to file for bankruptcy, keep in mind that it will likely have a negative effect on your ability to obtain credit for roughly seven years. It’s quite possible that companies offering cash loans for people with terrible credit will be your only options for obtaining credit after you file. Bad credit loans come with extremely high interest rates, and in all honesty it’s probably best if you avoid them. After a bankruptcy, it’s best to stay away from debt if possible so you can work on improving your credit score.