Chapter 7 FAQ
Are student loans dischargeable in bankruptcy?
Will bankruptcy set off the IRS's audit radar?
Can my bankrupt ex-husband get out of paying child support?
Can we get a home loan if my husband has a past bankruptcy?
QUESTION:
I've got $60,000 left in student loans, and I've been repaying them for ten years already. If I file for bankruptcy, will this debt be wiped out?
ANSWER:
The rules for discharging student loans in bankruptcy have gotten tougher over the years. Currently, student loans are dischargeable only if you can prove to the court that repaying them would cause you undue hardship, which is a pretty tough standard to meet. And to make this showing, you'll have to file a separate action in your bankruptcy case.
A bankruptcy court will discharge a student loan for undue hardship only if it believes you'll never be able to pay the loan back. For example, if you have a permanent disability and no future ability to work, and you have made reasonable efforts to pay off as much of the loan as you can by using the various non-bankruptcy options available, the court might find that paying back the loan is more than should be asked of you.
If you file for Chapter 13 bankruptcy, you can include your student loans in the repayment plan, and try to make a dent in them over the life of your plan. However, you will still owe whatever student loan debt remains when you complete your plan, unless you can convince the court that it would be an undue burden. Be warned, however, that bankruptcy courts are typically very reluctant to discharge student loans.
QUESTION:
I am preparing to file for Chapter 7 bankruptcy and have been advised that the IRS will look at this as a HUGE red flag. Apart from not understanding why, I am more curious as to what to expect. Do you have ideas on this?
ANSWER:
We are not aware of any policies -- written or unwritten -- targeting bankrupts for audits or other IRS problems. With more than 1.5 million people filing for bankruptcy in each of the first five years of the new millennium, the IRS would quickly run out of person power if it targeted or specially screened the tax returns of former bankrupts. The agency is already hard-pressed hectoring souls for nonpayment and other such deadly sins. You probably don't have much to worry about from its quarters.
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Copyright 2006 Nolo
