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Bankruptcy can eliminate debt on some Wisconsin student loans

College graduation is a great accomplishment. However, looming in the background for many Wisconsin graduates are overwhelming student loan debts. Although bankruptcy is not a viable debt relief option for most debtors with student loans, under rare circumstances some student loans can be discharged in bankruptcy.

Adding to the anxiety of many student loan borrowers is the uncertainty of their interest rate which can possibly double if Congress fails to act by July 1. In the unlikely event that happens, the interest rate on federally subsidized Stafford Loans would increase from 3.4 percent to 6.8 percent, which would add an estimated $1000 to the cost of every loan. The University of Wisconsin indicates that more than 82,000 students would be affected by the interest rate hike. The long term effect of paying more on student loans could result in less money available to spend or save and less money available to eliminate debt.

In very rare circumstances, federal student loans can be discharged in bankruptcy if a debtor can prove through an adversarial proceeding in bankruptcy court that repayment would cause an undue hardship on the debtor. The bankruptcy court generally uses a three-part test to determine if a debtor meets the undue hardship standard. The three-part test includes a determination whether the debtor’s minimum standard of living can be maintained while repaying the loan, whether the hardship would continue throughout the repayment period and whether a good faith effort has been made to repay the loan for a minimum of five years. All three requirements must be satisfied in order to pass the undue hardship test. In practice, this standard has proved extremely difficult for most debtors to meet.

Wisconsin debtors struggling with overwhelming student loan debts should consider the many repayment options available. Although bankruptcy will not result in a discharge of student loan debt for all but a few, a debtor may able discharge other debt through bankruptcy, making it easier to make the payments on the student loan debt. Debtors who believe they meet the stringent three-part test for undue hardship may benefit from discussing their options with a bankruptcy attorney.

Source: Superior Telegram, “Interest rates on Stafford loans could double without Congressional action,” Rich Kremer, April 17, 2013

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