Although not impossible, it can be very difficult to have your student loans discharged through bankruptcy. This is because student loans are considered non-dischargeable debts, a certain kind of debt that bankruptcy is not designed to wipe out. In most cases, student loans are only discharged if the debtor becomes disabled, dies, or can prove that the school falsely certified their eligibility to receive a loan.
However, if you can prove that repaying your loans would cause “undue hardship” to you and your dependents, then it is possible to have your loans completely or partially discharged through Chapter 7 or Chapter 13 bankruptcy.
Determining Undue Hardship
To determine undue hardship, the courts will put your case up to a test of their choosing. A commonly used test to establish undue hardship is the Brunner Test.
Brunner Test
The Brunner test has three key components for determining undue hardship:
- Based on your current income and expenses, forcing you to repay your loans would prevent you from maintaining a minimal standard of living for you and your dependents.
- Your current financial situation is likely to continue for a significant part of the repayment period.
- You have tried to repay your student loans in good faith before filing bankruptcy. (This usually means you’ve been in repayment for at least five years).
Another common test is the Totality of the Circumstances Test. This test looks at all the relevant factors in your case to determine undue hardship.
Please know that proving undue hardship to the court is not an easy thing to do. However, if you have a low income or your loans are from a for-profit trade school, you do stand a better chance.
How to Discharge Your Student Loan in Bankruptcy
To have your student loans discharged you must file a complaint with the bankruptcy court called a Complaint to Determine Dischargeability. Once you’ve filed the complaint, it is up to you to provide evidence for why your loans should be discharged. Doing this is no simple task. That is why it’s always best to have an experienced bankruptcy attorney to help you build your case and guide you through the process.
A bankruptcy attorney can also help you find out what test the court in your jurisdiction uses and how they have ruled in the past. This knowledge will prove to be a great asset when building and presenting your case.
What If Your Student Loans Are Not Discharged?
In the case that your student loans are not discharged, there are still a few things you can do to help your financial situation through bankruptcy.
If you’re filing for Chapter 13 bankruptcy, you may be able to pay a reduced amount during your bankruptcy plan. This means that your plan, not your loan holder, gets to determine the size of your student loan payments, making it easier for you to pay off your debts.
(Note: A typical Chapter 13 plan lasts for 3 to 5 years, and you will still owe the remainder of the student loans once you come out of bankruptcy. However, you can still try to prove undue hardship at this point and have the rest of the debt discharged.)
While you’re repaying loans through the bankruptcy court, all collection actions will be halted. This is promised through the automatic stay provision included in Chapter 7 and Chapter 13 bankruptcy.
Bankruptcy offers many avenues that can be taken to help lift the financial burden of student loans. A discussion with a bankruptcy attorney should help you determine which one is best for you.