Is It Impossible to Discharge Student Loans?

It has been widely reported that student loans cannot by discharged, even by bankruptcy. People believe that the only way to get rid of their student loans is through full repayment or death. However, this "common knowledge" is not entirely true. Although it is very difficult to get student loans discharged through bankruptcy and your particular situation must meet the right criteria, there are people who successfully discharge their student loans through choosing bankruptcy every year.

The first condition a person must meet if they wish to have their student loans discharged after filing for either Chapter 7 or 13 bankruptcy is that they must be able to prove that their student loans cause them "undue hardship." Judges use a three-pronged test commonly known as the Brunner test to establish undue hardship. In order to prove hardship, the applicant must meet all three prongs of the test. They are as follows:

1) the debtor[s] cannot maintain, based on current income and expenses, a 'minimal' standard of living for [themselves and dependents] if forced to repay the loans

2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and

3) that the debtor[s have] made good faith efforts to repay the loans

As you may have guessed by the three prongs of the Brunner test, "undue hardship" clauses are mainly used for people who people who have become permanently disabled and therefore unable to work. However there are other circumstances in which a judge may move to discharge your student loans. For example, a person who will be unable to provide necessities for his or her dependent children would be a good candidate to apply for undue hardship.

However, the difficulty of the undue hardship clause should not necessarily discourage you from trying to discharge your student loans. A recent study published by the American Bankruptcy Law Journal found that 39% of people who went through the process correctly were able to discharge their student loans. This directly contradicts the popular idea that it is impossible to get rid of your student loans.

If you find that your loans are causing you extreme financial hardship, you should consult an attorney experienced with bankruptcy. A bankruptcy attorney will be able to tell you whether or not your case has the potential to meet the three conditions for undue hardship and guide you through the process if it is. 

Mortgage Modification Can Affect Your Credit

Mortgage modification has recently become a popular option for homeowners who are having difficulty meeting their financial responsibilities. Mortgage modification can help financially strapped families avoid foreclosure and remain in their homes. However, it is important to know that mortgage modifications can also have an effect on your credit.

When you apply for and subsequently accept a mortgage modification from your lender, that modification is reported to the three credit bureaus. The report should indicate that you, the mortgage holder, are participating in a program that qualifies you to send in partial payments on your mortgage. This is translated negatively on the your credit report, leading to a decreased score. 

The good news is, the hit on your score will most likely be small. The U.S. Treasury Department recently reported that it can range from 30-100 points. For a family facing foreclosure, which is guaranteed to create an even larger hit to the credit score, it is probably worth it to take the smaller decrease and move forward with mortgage modification. Fortunately, credit bureaus are now developing a new way to report some mortgage modifications in a way that will not negatively affect your credit. Still, it is important to be aware of all the financial implications of any mortgage modification. Possible unforeseen effects, such as decreased credit, are why it is so crucial to consult an attorney before making major financial decisions. Your attorney will guide you through the process and help you make the right decision for your family.

- Kevin McKernan