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  Dear
Dr. Don,
I have close to $12,000 in student loans and $5,000 is owed to a
school. I live on my own and I am financially responsible for myself.
What type of bankruptcy should I file and why?
-- Sharie Scholar
 Dear
Sharie,
The federal government changed the rules in 1998 and it's now very
difficult to have student loans discharged in bankruptcy. The standard
for having the loans discharged in bankruptcy is to establish that
repayment would constitute an undue hardship on the debtor.
Discharging student loan debt in bankruptcy using
the undue hardship standard isn't easy. The petitioner has to prove
hardship to the bankruptcy court. In general this means that you
must demonstrate to the court that you can't maintain a minimal
standard of living for yourself and any dependents if forced to
repay the loan(s), and that you have no real prospect of being able
to repay the loans in the foreseeable future. However, bankruptcy
courts in some circuits may allow the judge to find that the debtor
can repay part of the loan without hardship and discharge the rest
of the loan balance.
Even if the bankruptcy court won't discharge your
student loan debt, filing a chapter 7 bankruptcy petition would
discharge other eligible debts, and that might free up enough cash
flow to allow you to afford your student loan payments. The $5,000
owed to the school may be dischargeable in bankruptcy, depending
on the type of debt.
In general, a Chapter 7 bankruptcy is a liquidating
bankruptcy where a bankruptcy estate is formed from your non-exempt
assets and the proceeds are used to pay your creditors. In contrast,
in a Chapter 13 bankruptcy you develop a court-approved repayment
plan that runs over the next three to five years and, upon completion
of that plan, the bankruptcy court discharges any remaining eligible
debts.
Without knowing anything about your income or finances,
other than that you have $12,000 in student loan debt, there is
no way for me to determine whether repaying these loans represents
an undue hardship. Since it's the bankruptcy judge you have to convince
anyway, I suggest you talk to a bankruptcy attorney about your situation.
The Bankruptcy Abuse Prevention and Consumer Protection
Act of 2005 broadens the types of educational loans that may not
be discharged while preserving the hardship standard for discharging
a student loan in bankruptcy.
The changes to the bankruptcy code are expected to
take effect six months after President Bush signs the bill into
law. It's anticipated that the effective date will be sometime in
October 2005. If filing for bankruptcy makes sense for you, it's
likely to make more sense to do it under the existing bankruptcy
code than to wait.
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