A Chapter 7 Bankruptcy, successfully completed, results in a 100% discharge of all your unsecured debt, thereby giving the file a fresh start in their economic life. But what about student loans? These, although unsecured, are not dischargeable in bankruptcy. The only way they can be discharged is tp prove undue hardship, requiring a complicated legal analysis. So although the government allows other debt to be discharged, they won’t allow their loans to be discharged. If you want to change it, you should contact your congressmen and senators.
What about if you paid for your child’s student loans and then you file for Chapter 7 Bankruptcy? Here you run into two issues. One, as in the paragraph above, you can’t discharge any obligation you incurred on the student loan. It still has to be paid. Two, there is the potential problem of an illegal transfer of funds from you to your child within four years of filing for bankruptcy.. In Connecticut, Bankruptcy forbids transferring any property out of your name into another person’s name in the four years before you file bankruptcy, subject to certain exceptions and limitations. Thus you can’t sign over a car or house to someone without risking the bankruptcy trustee will take it back from the transferee and sell it. This also applies to cash transfers. However, thankfully, Connecticut has recently passed a statute removing the paying for college from the four year transfer rule, so the Connecticut four year rule against transfers does not now apply to student loans.. But, you are still not out of the woods, since the federal bankruptcy rule of two years now applies. The long and short of it, if you have paid for anyone’s college in the two years before filing for bankruptcy, you risk the Trustee suing the college to get the money back, and they might in turn come after the debtor or the student. Thus debtors are advised to seek legal advise on how to deal with this issue. Please feel free to call Mark O. Grater in Groton, CT at 860-449-8059.