Credit card charges are considered unsecured debt because they're not backed by collateral such as a home or car. Because of this, credit card debt is typically discharged in a chapter 7 bankruptcy. However, if you made any of your student loan payments using a credit card, you might still be held liable for that debt. Here's more information about this potential problem.
Student Loans Are Not Dischargeable
Student loans are one of the few debts that cannot be discharged during bankruptcy. The trouble is dischargeable debt—such as credit cards or personal loans—used to pay student loans becomes non-dischargeable too under bankruptcy law. So even though the debt you built up on your credit cards would typically be wiped out in a chapter 7 bankruptcy, you could still be ordered to reimburse the lender for the portion of funds used to pay your educational loans.
It's important to note, though, this only becomes an issue if the creditor disputes your bankruptcy discharge and cites those student loan payments as the reason. If the lender does not bring the matter up in court, the credit card debt will likely be released as normal.
Getting Student Loan Payments Discharged
The only way to get the student loan payments on your credit card discharged is to convince the court to also wipe out your student loans. As mentioned previously, bankruptcy law prohibits the discharge of educational debt. However, the court may make an exception if you can show paying off the loans would represent an undue hardship for you.
To successfully obtain an exemption, you have to demonstrate three things:
- You are unable to maintain a minimum standard of living if you're forced to pay the loans
- Your financial circumstances are unlikely to change for most of or the entire repayment period
- You made an attempt to pay on the loans
The court will typically conduct financial tests to determine if you qualify for the exemption. If you pass, your student loans and the associated credit card debt will be eliminated.
It may also be possible to get your student loans debt wiped out if you can show the school committed fraud. The Department of Education has recently invoked a little-known rule called the Borrower's Defense (also called Defense Against Repayment) that ends a debtor's obligation to pay student loans if the school he or she attended engaged in fraud. Typically, you would have to work directly with your loan servicer to obtain this relief. However, the bankruptcy court may also consider discharging the student loan debt under this rule if you can supply compelling evidence of fraud.
For more information about non-dischargeable credit card debt or help dealing with your student loans, contact a bankruptcy attorney, like one from Todaro David M Co LPA.