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Bankruptcy and student loans: Two benefits

Whether struggling to make mortgage payments, pay off student loans or dealing with credit card debt, bankruptcy can be a helpful tool to help regain your financial footing.

Many may be surprised to find student loans on that list, but bankruptcy can help those who struggle to pay off education debts. Two common benefits include:

  • End of creditor harassment. Once a petition for relief through bankruptcy is granted, all attempts by creditors to demand payment must stop. This is because once the petition for relief is approved, the court issues an order referred to as an automatic stay. Once issued, creditors are not allowed to call, write or otherwise contact you to demand payment. The creditor can face repercussions if this order is violated.
  • Discharges debt. In some cases, student loan debt is dischargeable through bankruptcy. This means the amount that is left on the loan could be forgiven.

Attempting to discharge student loan debt in bankruptcy is becoming more common, likely as more and more students are racking up high levels of debt in an attempt to make themselves more marketable in a tough job market. A recent article in Nerdwallet discussed the process, noting student loans can be discharged, but that it requires an extra step.

What extra step is needed to discharge student loans in bankruptcy?

Generally, in order for a student loan to be discharged the person requesting relief must establish that the debt causes an undue hardship. This test requires meeting three different criteria.

The first involves establishing that the debt results in an inability to maintain a minimal standard of living. The second, a showing that other circumstances make it difficult to make these payments. One example would include a health issue. The third requires that there be a good faith effort to make the repayments. This can be shown in a number of ways, including attempting to adjust the payment plan into a more manageable schedule.

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