Most of us would not imagine that students could find themselves bankrupt. But in fact, the connection between student loan debt and bankruptcy is far stronger than many would have thought. It is a complex relationship, with crushing college debts causing considerable financial misery even a decade after graduation.
Statistics show that the debts accrued in an effort to secure a university education are becoming a major cause of bankruptcy, not necessarily the debts accrued in the working world. If nothing else, this fact makes the task of managing and clearing college debt more important than ever.
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However, while some people will be willing to accept bankruptcy as a way to finally clear their debts, student loans are not included in any bankruptcy deal. So, even after a ruling wipes out debt, a key contributing factor to the poor financial situation remains. So what can be done?
Student Debt and Bankruptcy
So, what exactly is the relationship between student loan debt and bankruptcy? Well, the best way to describe it is in one word - complex. For instance, if bankruptcy is filed by a 30-year-old with debts of $200,000, including college loan balances of $50,000, the case will only deal with $150,000 of debt.
The reason offered is that lenders provide students with a significant number of breaks, often providing periods of grace that last 3 or 4 years before repayments begin. That means the borrowers have had ample time to prepare for clearing college debt. So, why lose their money?
However, it is possible to have the debt forgiven. Known as the 10-10 Standard, this sees the borrower commit 10% of their salary for 10 years, with the balance written off. It means the student loans are cleared at a fraction of the full debt, but often at a price as there is a negative effect on your credit history. Still, it has less of an impact that bankruptcy has.
There Are Exceptions
In the vast majority of cases, student loan debt and bankruptcy are handled exclusively of each other, but there are some cases where exceptions to the rule exist. The most common is the Undue Hardship Exception, where borrowers prove an inability to repay the loans regardless of the interest charged or terms provided.
Needless to say, applicants seeking to secure this exemption are required to prove their case. It effectively means they must prove themselves unable to provide for their dependents or themselves unless these debts are removed. Clearing college debts like this is only available to those most in need.
The key test to prove qualification is the Brunner Test, which requires applicants to show a minimal standard of living cannot be maintained, that an unstable financial situation will exist while repaying, and that a reasonable attempt has already been made to clear the student loans.
Consult Before Deciding
It is important to have a good bankruptcy attorney to consult when preparing for this kind of case, and to find out if the Undue Hardship Exception is possible to secure. Remember, the relationship between student loan debt and bankruptcy is complex, so what may seem obvious may not actually be.
Filing for the exception is a complicated task, so be sure to speak to those in the know before making a move. Clearing college debts lifts a weight of pressure off your shoulders, but it is essential that the application is submitted in perfect order if student loans are to be included in your bankruptcy filing.
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