Does a student loan make bankruptcy hopeless?

Requirements for discharge of a student loan in a bankruptcy proceeding are daunting, but even if you don't qualify, a bankruptcy may help your overall finances

Many young people in Kentucky today are saddled with student loans after graduating from college. At the same time, when they need to be able to obtain long-term jobs with strong potential for wage growth, in the last decade, they have graduated into one of the worst job markets since the Great Depression. Many are trapped in temporary, minimum wage employment in entry-level positions in service industries like food service and retail, if they can find work at all.

Against this backdrop, they begin receiving student loan repayment requests. They may use forbearance in an attempt to delay loan payments, but for many it is a constant struggle between covering their rent, food, transportation and making the student loan payments on time.

What happens if you get sick or are injured?

This can become impossible when they lose a job or suffer an injury or illness and lose time at work while simultaneously generating medical bills that wind up being added to their total debt.

Federal student loans seemed like a good bet at one time, when jobs were reasonably plentiful, a college grad was likely to find a good job and most students accepted that their first few years out of school could be lean, as they paid off their loans.

Today, with continuing low employment rates and flat wages, leaving school with student loans looks like worse odds than most would obtain in Las Vegas at a gaming table. An additional problem for borrowers with student loans is that they may find out too late that student loan debt is generally not dischargeable in a bankruptcy proceeding.

Undue Hardship

In theory, in bankruptcy, a student loan can be discharged with a showing of "undue hardship," but as interpreted by many courts in the U.S., this standard is very difficult to meet.

You need to have attempted to make the loan payments; you need to show that if you continue to make the payments that you will suffer undue hardship, essentially meaning you are destitute and virtually unable to pay any other of your necessities. And this condition needs to be likely to continue indefinitely.

The U.S. Supreme Court recently denied hearing case that could have led to a modification of that standard, meaning the court will be unlikely to change that standard anytime in the foreseeable future.

What can bankruptcy do to help?

Bankruptcy filings are inherently personal. The schedules consist of borrower's specific debts, his or her income and assets, if any. There are no one-size-fits-all solutions, but even you do not qualify for an undue hardship discharge for your student loans, a bankruptcy filing may still help your financial situation.

By eliminating many of your other debts, such as those from credit cards or caused by uninsured medical expenses, you can free up sufficient funds that may allow you to begin to make real progress in reducing the balance of your student loans.

Attorney Ginger C. Cord can go over your finances and help determine which type of bankruptcy filing best meets your needs and whether your situation is so dire that an undue hardship discharge could be possible.