If you research Chapter 7 bankruptcy, you may come across the confusing fact that student loan debt is not dischargeable except under narrow conditions. Especially if you aren’t able to pay your student loan bills, this may seem unreasonable, but this is a special case for several reasons.
According to the Department of Education’s website, a graduate must prove “undue hardship” in order to discharge federal student loans, but success is exceptionally rare. The court defines hardship fairly restrictively; you must not be able to keep a minimal standard of living while paying student loans. A court often reserves this title for the most destitute situations.
One reason for this limitation is that there is no collateral for repaying student loans. Whereas debt from a mortgage or car loan is linked to a tangible object, student debt is not. Education is essentially a service, after all, which you can’t sell back to the government.
Other kinds of non-physical debt, such as gambling or credit card obligations, are usually at the expense of private corporations. However, federal student loans are backed by the government itself. Unpaid loans can collectively inhibit other government services.
Furthermore, the majority of private student loans come from a handful of corporate lenders, including Sallie Mae. Some skeptics believe that these companies abuse their power to ensure that bankruptcy won’t be an obstacle to their profits. Recent litigation with lenders such as Navient may contribute to this notion.
Students and graduates of the many higher education institutions in southeastern Missouri can use this information to plan their finances. Deferment and forbearance may help some people who can’t prove undue hardship.
Every financial situation is different, however, so the best course of action is often unclear. Anyone in suffocating debt should carefully review their options, including Chapter 7 bankruptcy, to make a long-term plan for recovery.