What Happens To Private Student Loans In Chapter 7?

Here’s a breakdown of what happens to private student loans in Chapter 7 bankruptcy, along with essential factors to consider:

Limited Dischargeability

• Unlike many forms of debt (credit card, medical, etc.), private student loans are very difficult to discharge in a Chapter 7 bankruptcy.
• They generally remain your responsibility even after the bankruptcy is complete.

The Undue Hardship Exception

• There IS a chance for discharge, but it’s challenging.
• You must prove to the bankruptcy court that repaying your private student loans would cause “undue hardship” on you and your dependents.
• The standard for “undue hardship” is strict and varies across courts. It usually involves:
  • Inability to maintain a minimal standard of living while repaying the loans.
  • Your hardship situation is likely to continue for a significant portion of the loan repayment period.
  • You’ve made genuine efforts to repay your loans before resorting to bankruptcy.

Adversary Proceeding

• If you aim to discharge private student loans, you’ll need to file an “adversary proceeding” within your Chapter 7 case.
• This is like a mini-lawsuit where you must present evidence and arguments to support your undue hardship claim.

Possible Outcomes

• Full Discharge: Rarely, but if successful, the court may discharge your private student loans entirely.
• Partial Discharge: The court could reduce the amount you owe, but you’d still be responsible for some of the debt.
• No Discharge: The most common outcome. You’ll be responsible for the full loan amount under the original terms.

Important Considerations

• Legal Representation: It’s highly recommended to consult a bankruptcy attorney. The process of proving undue hardship for student loans is complex and legal advice is crucial.
• Alternatives to Bankruptcy: Explore other options for managing student loan debt before considering Chapter 7:
  • Income-driven repayment plans
  • Deferment or forbearance
  • Refinancing (if you have good credit)
  • Student loan forgiveness programs (if eligible)