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It is possible to file for bankruptcy in the United States in order to discharge student loan debt at both federal and private level, so how does it work for 42 million Americans with debt?
Generally, filing for bankruptcy should always be considered a last-gasp option because of the lasting impact on credit scores and the costs involved with filing, as well as the time it consumes.
However, if the burden is too overwhelming then it's possible to file to clear student debt through the legal action of going officially bankrupt; upon petitioning before a court.
Once the process of declaring bankruptcy begins, debts will be paused until a judge determines they must either be cancelled or payments and interest rates should resume.
How do I file for student loans bankruptcy?
In order to begin the process of filing bankruptcy regarding student loans, ensure you begin a petition for an adversary proceeding. Here, you can have your loans discharged on the condition you prove undue hardship.
Ultimately the court decides what is and isn't undue hardship and the federal government, as your creditor must also agree. They are represented by the Department of Justice.
If you can convince the DOJ of undue hardship, then they will recommend to the court that your student loans are discharged; although this can be on a full or partial basis as determined by the judge.
What happens next?
The DOJ and the court consider three elements when it comes to discharging student loans. They are your present ability to pay, future ability to pay and finally your good faith effort.
To satisfy the present ability, an assessment of whether you will be able to maintain a minimal standard of living will be considered. If your expenses equal or exceed your income, you will be considered unable to do so.
Then they consider your future ability to pay. If you can show your undue hardship will continue into the future and has a significant time left, the DOJ will assume you cannot pay if you are retired, disabled, chronically ill, have no degree or historically unemployed.
Finally they assess whether you acted in good faith. For example, you acted in good faith if you were trying to make your payments before filing for bankruptcy and if you notified the Department of Education or your creditor.