Bankruptcy and Student Loan Debt
In most cases, student debts cannot be discharged in bankruptcy, but there is one exception.
Student loan debt will not be discharged (wiped away) in most Chapter 7 or Chapter 13 bankruptcy cases. If you can show that repaying your student loans will cause you undue hardship, you may be able to discharge them in bankruptcy.
The Undue Suffering Exemption
To have your student loans dismissed in bankruptcy, you must show that paying them will cause you undue hardship. The standard for establishing undue hardship differs from court to court.
Furthermore, many courts see the undue hardship test as an all-or-nothing proposition: either you qualify for the whole debt to be forgiven or you don’t. A part of a debtor’s student loan has been dismissed in other courts.
Most courts, regardless of the criteria employed, are hesitant to discharge a student debt. You may have a better chance if you have a very low income or if your loan is from a for-profit trade school.
The Brunner Test
The Brunner test is used by certain courts. If you satisfy all three of these criteria, you may be able to discharge your student debt.
- Poverty. If you are compelled to return your debt, you will not be able to maintain a minimum level of life for yourself and your dependents based on your existing income and expenditures.
- Persistence. For a substantial portion of the payback term, your present financial position is likely to persist.
- With good faith. You have attempted to repay your student debt in good faith.
The Test of the Totality of the Circumstances
The totality of the circumstances test is used by other courts. The court will consider all relevant facts in your case to decide whether repaying your student loan is an unreasonable burden for you.
Other criteria exist, such as a specific test for Health Education Assistance Loans (HEAL), in which you must demonstrate that the loan was due more than seven years ago and that repayment would be a “unconscionable” burden on your life.
Other courts employ other tests as well. Speak with a local bankruptcy attorney to learn more about the test utilized in your area.
How to Get Your Student Loan Discharged in Bankruptcy
If you wish to attempt to discharge your student debt in bankruptcy, you must file an adversary action with the bankruptcy court to assess discharge ability. That’s not all, however.
You’ll have to provide proof and show the court that repaying your debts would put you in a lot of trouble. You’ll almost certainly need to hire an expert to testify regarding your capacity to find work in the future.
Raising Student Loan Debt Defenses in Bankruptcy
If you attended a vocational or trade school, you may have defenses against repayment of your student loan debt. Breach of contract, unfair or misleading commercial tactics, or fraud are all examples. If you succeed, you won’t owe the obligation at all, rendering the question of discharge ability irrelevant.
Consider contacting an attorney
The Brunner test or other criteria are used for Chapter 7 and Chapter 13 debtors in many court proceedings. Knowing how the court in your jurisdiction has decided in the past may help you predict your chances of success.
If you have a significant student loan debt, you should speak with a local bankruptcy attorney. If you elect to fight the discharge ability issue or raise a defense to the loan in bankruptcy court, you’ll almost certainly require legal representation.
What Happens If You Don’t Get Your Student Loans Discharged?
Here’s what happens if your loans aren’t wiped in bankruptcy, as they usually aren’t.
- Bankruptcy under Chapter 7. If paying your debts isn’t an excessive burden in Chapter 7 bankruptcy, you’ll still owe them after your case is over.
- Bankruptcy under Chapter 13. If you cannot discharge your student debts, Chapter 13 bankruptcy may be able to assist you. For example, you’ll probably be able to pay a lower amount during your Chapter 13 plan, but you’ll be responsible for the remaining balance after your payback term expires.
Loans from the government vs. loans from private lenders
A substantial portion of student loans is financed by the federal government. (In 2010, the federal government began providing direct loans.).
Private financial organizations, such as banks, do, nevertheless, provide loans to students, mainly because many students cannot afford to pay for their whole education without assistance.
It makes no difference whether you have a federal or private student loan. To be eligible for a bankruptcy discharge, you must demonstrate that repaying the debt will cause you undue hardship.
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