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Can Student Loan Consolidation Help You Avoid Bankruptcy?

One of the most common questions people have when they consider bankruptcy is “can student debt be discharged in bankruptcy?” In most cases, the answer is “no.” However, there are other things you can do to improve your financial situation when you have significant student loan debt and you’re considering bankruptcy.

Here’s what you need to know.

Student loans are not dischargeable in bankruptcy, with one exception. If you’re able to establish undue hardship by filing an adversary proceeding in your bankruptcy case, the court could provide relief from your student loan obligations.

Doing so is challenging and people filing for bankruptcy rarely meet the standard for undue hardship. To do so, you must show that you’re unable to meet the minimum standard of living for you and any of your dependents due to your student loan.

Most bankruptcy judges require filers to demonstrate three things to qualify for undue hardship:

  • Payment obligations prevent you from maintaining a minimal standard of living
  • This status is likely to continue for a significant portion of the loan’s repayment period
  • You’ve made good faith efforts to repay your student loan

To show that they meet the standard of undue hardship, borrowers must initiate an “adversary proceeding.”

This is a lawsuit within the bankruptcy case brought against the borrower’s student loan lenders. They must show evidence that they meet the undue hardship standard and lenders present evidence to the contrary. It’s a lengthy and sometimes complicated procedure and very few people filing for bankruptcy meet the standards of undue hardship. In most cases, to do so, you’d need other extenuating circumstances, such as a disability, to qualify.

To learn more about an adversary proceeding and what it includes, check out this information from Nolo’s encyclopedia.

If I Can’t Discharge Student Debt, What Can I Do?

Now that you know the answer to “can student debt be discharged in bankruptcy?” you can look for other ways to resolve your financial situation.

One of the most common ways of dealing with student loan debt is debt consolidation.

For those filing for Chapter 13 bankruptcy, consolidation is one of the best ways to move forward. You won’t discharge your loan, but you’ll consolidate it into your debt repayment plan under bankruptcy.

This also allows you to challenge the amount owed. In some cases, the bankruptcy court reduces the amount owed by the borrower after evaluating the loan and determining the lender charged improper interest or penalties.

Consolidation might still be an option even if you aren’t filing for Chapter 13.

Many lenders will assist you in consolidating your loans. This often results in a decrease in your interest rate, so you’ll save over time repaying your loan. Keep in mind, federal loans typically have lower interest rates. It’s important to weigh the pros and cons of private consolidation and in most cases, it won’t be beneficial unless you’re consolidating private loans.

Is Deferment a Better Option?

Deferment is another option to help you deal with student loan debt. If you are currently facing financial hardship, whether or not you pursue bankruptcy, you can request a deferment. This means you won’t have to pay your monthly payment for a period. Deferment is usually available for people not in default who are dealing with job loss or a change in income.

Finally, you might qualify to have your student loans canceled or forgiven if you meet the requirements to do so. People with public service or jobs in education are eligible.

The bottom line is you have options if student loan debt is a problem. When you’re dealing with credit card debt or medical debt or other types of debt, bankruptcy is often the best option. But bankruptcy can only do so much for student loan debt. The good news is you aren’t out-of-luck your student debt is one of your concerns.

If you’d like to know more or you have questions about how loan consolidation can help you avoid bankruptcy, contact the Law Office of Robert M. Geller at 813-254-5696 to schedule a free consultation.

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