Can I declare bankruptcy to get rid of my loans?

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Can I declare bankruptcy to get rid of my loans?

My payments are $1,000 a month. I live at home with my parents. I work 2 jobs and my payments are over my monthly income. I have a total of $151,000 in student loans. My loans are private. What are my options?

Asked on April 23, 2012 under Bankruptcy Law, Ohio

Answers:

SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 9 years ago | Contributor

At present, you do not have any particularly good options. Legislation passed in, I believe, 2005, made private student loans non-dischargeable in bankruptcy, the same way government-backed student loans are non-dischargeable; that is, you cannot eliminate these debts in bankruptcy. Or more technically: you can discharge them if you can show "undue hardship," but this is very difficult. A common test for undue hardship finds it only if: 1) the debtor)(that's you) cannot maintain, based on current income and expenses, a “minimal” standard of living for the debtor and the debtor’s dependents if forced to repay the student loans--basically, you're living in abject poverty; 2) additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans--so there's no reason to think your salary will go up, putting you in a better financial position; and 3) the debtor has made good faith efforts to repay the loans.

With how much you owe and the circumstances you describe, it would most likely be worthwhile filing for bankruptcy and trying to discharge these loans. Retain experienced bankruptcy counsel to help you--having an experienced lawyer on your side will maximize your chance of success. But you need to be prepared for bad news, unfortunately--the last statisctics I saw indicated that less then 1% of pepple who applied for a hardship discharge of student loans received one.

As for other options: you an try to negotiate with the lender to forgive some of your loans, to reduce the interest rate, and/or to defer them for a time. But all these are voluntary on the lender's part, and the difficulty with discharging the loans deprives you of leverage in negotiating with the lender.


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