Does Bankruptcy Clear Student Loan Debt?

Earning a college degree is an incredible achievement but it comes with a serious cost. And that cost is a burden that grads often carry for decades after – the average federal student loan debt in the U.S. is more than $37,000!

In an ideal world, that degree you’ve worked so hard for helps you get a better job and earn a higher income, right? But life doesn’t always work out the way we hope, so what should you do if you’re not making enough to cover your student loan payments?

One option to consider is filing for bankruptcy. It’s not a choice that you should take lightly, though – it could leave a deep dent in your credit history for a pretty long time. So how can you tell if declaring bankruptcy is the right choice for you? WorkMoney is here to help you make this important decision. We can help you figure out whether bankruptcy is your best bet against student loan debt.

Bankruptcy – Here’s What You Need to Know

Bankruptcy is a legal lifeline for those who just can't seem to shake off their debts. It can be like hitting the reset button on your debt. In some cases it wipes the slate clean; in other cases, it restructures the payment plan so it’s more manageable for you. There are two kinds of bankruptcy you need to know about: Chapter 7 and Chapter 13.

Chapter 7 bankruptcy is also known as liquidation but there's a catch – you have to pass a means test that checks if you can pay your debt based on your income. If that doesn't pan out, you may have to opt for Chapter 13 bankruptcy.

Chapter 13 bankruptcy, on the other hand, protects your home from being sold off to pay your debts, which may happen under Chapter 7. It comes with a repayment plan cooked up by your attorney and the court, spanning 3-5 years. Not a walk in the park, but it does alleviate some of that financial anxiety. After the agreed time, the court tosses out any remaining non-priority debts, even if they’re not fully paid off.

So, Can Bankruptcy Wipe Out Your Student Loans?

Bankruptcy can help you clear away credit card and medical debt, as well as debt from personal loans. It can also be helpful when it comes to judgments from lawsuits, repossessions, and foreclosures.

When it comes to student loans, it’s possible, but it does require some extra homework, including an additional step of filing an adversary proceeding in a bankruptcy filing. This proceeding determines whether your debt should be discharged, but in order to have it discharged, you must demonstrate that not having it discharged would cause you to experience undue hardship.

If the bankruptcy court decides you've passed the hardship test and meet the specific conditions, it could discharge your debt fully or partially, which means you won't have to pay it anymore. The court might also cut you some slack with a repayment plan that has a lower interest rate or minimum payment, making it easier for you to clear the debt.

Looking for Alternatives to Bankruptcy for Student Loan Debt?

If bankruptcy isn't your cup of tea or you don't qualify, don't sweat it. We've got your back with Savi, a student loan repayment service that can tell you if you qualify for loan forgiveness and offers options to manage your debt. Give our savings estimator tool from Savi a whirl – all you have to do is type in your loan amount and check out your estimated savings.