Student Loan Myth IV: If my student loans become too much, I can file bankruptcy

We are into our second of three installments of student loan myths.  For this section we will start with a myth that is perpetuated by many companies on tv, student loan bankruptcy.

What you think happens. You are over your head with student loan debt.  Your friend ran up a similar amount in credit card debt and was able to bankrupt the debt, wiping it away.  If you could do the same thing with student loans, it would provide so much relief.

What actually happens. Student Loans generally are not able to be discharged through bankruptcy.  The problem is you have to provide evidence that the hardship is created, will continue, and you have made a good faith effort to pay.  With programs such as Income Driven plans allowing payments as low as $0.00, it is only in highly rare situations that a bankruptcy court will allow this discharge to happen.

Where there may be a morsel of truth to this.  The word rare of course says there are instances where it can happen.  As touched on briefly above, if you file Chapters 7 or 13 for your bankruptcy, this discharge is only awarded  if repayment will impose undue hardship on you and your dependents.  This is decided by a court during an adversary proceeding and is based on a three prong test:

1) If you are forced to repay the loan, you would not be able to maintain a minimal standard of living

2) There is evidence that this hardship will continue for a significant portion of the loan repayment period

3)  You have made a “good faith” effort to repay your loan before your filing.  As a result, this means you must be in repayment for a minimum of five years.