Loan Application Tips

How Old Student Loans Factor Into Bankruptcy

by Milton Horton

Student loans are often one of the largest expenses in a young person's life, so if the possibility of filing for bankruptcy is on the table, it is important to know how these loans will affect your financial future after filing. There are two major ways you can have some or all of your student loans forgiven if you declare bankruptcy: the Seven Year Rule and proving that continuing to repay your student loans will cause undue hardship on you and your dependents. Both of these are viable options for many graduates struggling with debt, so it is important to know which ones to use in which situations. 

The Seven Year Rule

This rule was originally implemented in 1998 and says that if you declare bankruptcy seven full years after you have completely finished school, then your student loan debts are eligible to be forgiven. It is important to note here that the rule is seven years after you have finished school, not seven years after you took out your loans. This means that taking one course after leaving school, even if you pay for it yourself, can set you back to day one in terms of having your loans forgiven. 

Proving Economic Hardship

The Seven Year Rule does have some leeway, however, if you can prove that repaying your loans would cause undue hardship on you or your dependents, then you will be able to have your student loans forgiven if you declare bankruptcy only five years after leaving school. However, this repayment method can be difficult, as you need to prove two main things to the court:

  1. That you tried diligently to repay your student loans in good faith
  2. That you have, and will continue to have, significant financial hardship that will restrict your ability to repay the loans

If you can prove to the court that these two provisions accurately describe your financial life and outlook, then you could get your loans forgiven a full two years earlier than normal after filing for bankruptcy. 

Bankruptcy can be a scary and arduous process, especially in regards to student loans, However, provisions like the Seven Year Rule are there to help you get back on your feet after bankruptcy, and can be a major help if you still owe thousands in student loans. Knowing how to use these provisions is key to protecting your financial well-being after declaring bankruptcy. Contact a professional like Vine & Williams Bankruptcy for assistance.