If you come to the point that you can't pay your debts as they come due, filing for bankruptcy may be an option to solve your problem. By doing so, you can discharge many of your unsecured debts. However, barring extreme circumstances, you can't discharge defaulted Sallie Mae student loans through bankruptcy. You can only discharge student loans by showing you'll suffer undue hardship by making payments.
Turn to Chapter 7
Filing a Chapter 7 bankruptcy petition means asking a court to forgive your unsecured debts, those that aren't secured by using property like a house or car as collateral. When you file an automatic payment stay, which prevents your creditors from collecting from you, goes into effect. In your filing you categorize your property as exempt and nonexempt. The bankruptcy trustee sells the nonexempt property and uses the money to pay your creditors. At the end of the case the bankruptcy court discharges most of your unsecured debt. That means your creditor can't take your property as payment if you default on an unsecured debt.
Sallie Mae Loans
Defaulted Sallie Mae student loan debt is unsecured. However, it's also a priority debt. The Bankruptcy Code designates priority debts as non-dischargeable. Therefore, in most cases a Chapter 7 bankruptcy filing won't cover defaulted Sallie Mae student loans. A bankruptcy court will honor one exception to this rule, however. It discharges your student loans if making the payments imposes an undue hardship on you and your dependents.
Unlucky Chapter 13?
When filing for Chapter 13 bankruptcy, which provides the chance to repay creditors over time, an automatic stay goes into effect as well. While it's in place, you propose a plan under which you'll repay your debts over three or five years. At the end of your Chapter 13 case the bankruptcy court will discharge some of your unsecured debts. However, defaulted Sallie Mae loan debts won't be among them barring one exception: the undue hardship discharge.
Proving undue hardship means filing what's called an adversary proceeding on top of your bankruptcy petition. A bankruptcy court will grant a hardship discharge if you prove three things: that you can't maintain a minimum standard of living if you have to make your student loan payments; that your financial predicament is likely to last for most of the repayment period; and that you have made a good faith effort to repay the loans.
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