Are Student Loans Forgiven in Bankruptcy?

When education becomes the debt that won’t go away.

Student loan debt stays with you

Most of us think of bankruptcy as that “final solution” for your finances when things are so screwed up that there’s no solving it – you push that button and level your financial outlook so you can get a clean start. Sure you’re starting from square one, but at least you’re not still behind, right?

Wrong!

Some debts just don’t go away – especially those issued by the good ole U.S. of A. And unfortunately, student debt is one of those things you’ll still be expected to address even after the ink is dry on your bankruptcy decree.

So can it at least be discharged or settled?

You might be thinking, “Well, okay. So the federal government isn’t just going to let me off the hook. But certainly I can settle the debt and discharge the remaining balance in a Chapter 13 bankruptcy, just like I do with my other debts.”

Wrong again.

There is no discharging or settling your student debts for less than you owe. You’re on the hook and you’re expected to pay.

Now that doesn’t mean you can’t do anything if you’re stuck. You can use student loan consolidation to roll all of your federal loans into one payment that’s a lot less that what you pay in total now.

What’s more, if you go through bankruptcy and get out from under the weight of your other debts, you should have more money available to focus on paying back your loans. Essentially, you should be able to find a way to make it all balance out once you’ve gone through the bankruptcy process correctly.

Fact: A bankruptcy is final once all payments are made, all assets are liquidated, and remaining balances are discharged.

Can private loans be discharged?

Not anymore.

Prior to 2005 when the Bankruptcy Abuse Prevention and Consumer Protection Act was signed, private student loans could be discharged through bankruptcy, even though federal loans couldn’t.

The government closed that loophole with the BAPCPA, so now no student debt can be discharged.

So how is student loan debt forgiven?

Not through bankruptcy. Instead, it’s forgiven through a combination of consolidation and consistent repayment.

If you consolidate your federal student loan debts using any of the five options available, then it is guaranteed that any remaining balances will be forgiven if you make payments for 25 years.

That might sound like an eternity to be paying off debt, but since consolidation is meant to provide lower payments, the term of the loan is usually extended. And, since the debt payments are lower, there’s a chance that you’ll still have some debt left even after making payments for 25 years. After the last payment, any remaining balances are forgiven.

In addition, if you work in a public service sector (you’re a nurse, a teacher, firefighter, police officer, etc.) then that forgiveness window is cut from 25 years to just 10 years. If you consolidate and make your payments on time, the remaining balances get forgiven after 10 years of making payments.