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How Chapter 7 bankruptcy influences student loans

It is widely understood that among the assets not eligible for discharge in a bankruptcy filing, student loans are among the most cumbersome. Many Florida students will enter the work force with considerable debt after several years of post-secondary education, but many in dire straits forgo the option of Chapter 7 bankruptcy because they believe they cannot expunge their student loan in this way. That is not entirely true in every case; in some situations, student loan can be discharged through the bankruptcy process. 

The key to this is for students to prove the loan is causing them "undue hardships." This essentially means they are unable to maintain a reasonable standard of living based on their income and expenditures because of the loan payments. While difficult to prove, this is not impossible. The student must meet three criteria: that minimal standard of living is unsustainable, that the financial situation is unlikely to change during the term of the loan, and that good faith effort has been made to repay it. 

This can be further complicated by the type of student loan in question. A nonfederal loan, issued by credit unions, schools and banks, is considered a private loan and can more easily be claimed in a bankruptcy filing. A federal loan, however, can be paid back using an income-driven repayment plan (IDR), which can invalidate a student's eligibility to have their loan discharged. All in all, discharging a student loan is a difficult, but not impossible, process. 

If it sounds complicated, the truth is it can be. Bankruptcy law is very detailed, and Florida students hoping to have their student loans discharged would benefit from learning about their own situations and how it relates to bankruptcy filings. The support of an experienced attorney would be useful in planning out these steps before filing for Chapter 7 bankruptcy. 

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Paul Urich
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