Hoping to discharge your student loans in bankruptcy?
Student loans are by their “default setting” not dischargeable in bankruptcy.
There may be special circumstances that would make your case and exception to the rule. Be warned, though: the exceptional cases are extremely rare. A student borrower can only discharge in bankruptcy his / her student loans if repayment of the loan would cause “undue hardship” for the debtor. Those quotes identify for you the $64,000 question: What exactly constitutes an undue hardship? Various courts have come up with disparate ways of defining “undue hardship.” Many now use a three part test known as the Brunner Test to figure out whether repaying those student loans will result in an undue hardship. A student borrower must satisfy all three parts of the Brunner Test in order to get a bankruptcy court to allow for the discharge of his / her student loans.
The Brunner Test
The first part of the Brunner
test is proving that with your present income and expenses, you can’t maintain a “minimal standard of living” for yourself and your dependents if forced to repay your student loans. Again with the definitions. Care to venture a guess as to what the court might say is a “minimal standard of living?” Think worst case and you won’t go far wrong. The Court might consider evidence of what constitutes the “poverty level”, for example but more likely your local court will want to see evidence of local costs of living. The second part of the test requires showing “additional circumstances” exist, proving that your current shortfall will likely persist for a pretty good chunk of the repayment duration of your loans. The third part of the test requires showing that you have already made “good-faith efforts” to repay your student loans. This last part of the test may effectively exclude many who have kept their loans in deferment or who are already in default on their loans.
If you believe that your situation satisfies all those elements of undue hardship, ask your attorney to file an adversary proceeding. That’s a component of your ongoing bankruptcy case, quite literally a case within the case. It will even be assigned its own case number. Only through the use of an adversary proceeding may a student borrower get a determination that requiring repayment of his / her student loan debt causes an undue hardship. If the court finds that you do not satisfy all three criteria of this test, your student loan debt will not be discharged.
Bankruptcy can be a solution to a student loan problem
However, that’s not the end of the story. Bankruptcy can still help you even if the student loan debt cannot be discharged. For some student borrowers, getting rid of other dischargeable debt – even sometimes including taxes – puts them in a position where their cash flow is good enough to pay the student loans. Having to repay only your student loan debt has to be a major improvement for most student borrowers. They are then able to focus on paying back their student loans, free from creditors harassing them. If you file for Chapter 13 bankruptcy, your student loan payments will be part of your repayment plan but, oddly, they are structured just as if they were credit card debts. Start the conversation with a bankruptcy evaluation and review your options.
The most recent updates on debt forgiveness and student loans
As of June, 2014 President Obama signed into law a new plan which will help lower-earning student borrowers catch a break if they establish a reduced payment amount and stay current on its payment requirements. So far, this looks like it will reach about 5% more of student borrowers than other assistance plans previously and currently in place. But it won’t help the parents who cosigned on the student loans. Long story short, we have a long way to go in making the management of student loan debt tolerable for the vast majority of borrowers. With student loan debt now comprising the majority of unsecured debt – even ahead of credit cards – we can hope – some say expect – that lawmakers are going to be paying closer attention to the issue.
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