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When are student loans eligible for bankruptcy? Two options

Taking time to pursue higher levels of education is supposed to set you up for future financial success. It is supposed to set you up for a better, higher paying job than your peers that choose not to go to college, law school, medical school or receive other post secondary training.

In theory, all these things are true. In reality, the burden of the student loans that may be required to pay for these educational opportunities can make financial security seem like a fairy tale.

For those that are struggling to make ends meet, there is another option. In some cases, student loans can qualify for discharge through bankruptcy.

Student loans and automatic discharge

The United States Bankruptcy Code is a complex and difficult beast. In some cases, this can work in our favor. Private student loans are one of those cases.

In order for private student loans to be exempt from discharge in bankruptcy, they must be from eligible educational institutions. If not from one of these qualifying institutions, the loan may be eligible for discharge.

What is an eligible educational institution? To make matters easy, the Department of Education provides a list of qualifying institutions. If not on the list, the private loan can qualify for bankruptcy.

It is important to note a distinction: this works for private loans but not those issued by the government. Take heart, if the loan is a federal loan or the institution is on the list provided by the Department of Education, other options are still available.

Student loans and undue burden

A second option involves establishing undue hardship. Essentially, establishing that a loan causes undue hardship requires the person filing for relief through bankruptcy to show two things. First, that the student loan results in a difficulty for the filer to maintain a "minimal" standard of living. Second, the filer must show that a good faith effort has been made to repay the loan.

If unable to meet these qualifications, yet another option is available. A chapter 13 bankruptcy may be a wise choice. This option results in the ability to restructure payment plans. Although the debt is not completely discharged, it may be adjusted to a more manageable amount.

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