Discharging Student Loans and Bankruptcy
Many people ask me about discharging student loans when they're looking into filing for bankruptcy. Typically, student loans aren't discharged
during bankruptcy proceedings. It's not impossible to accomplish if you can show that paying the student loan debt "will impose an undue hardship on you and your dependents". Bankruptcy judges use various tests to determine whether a borrower has proven undue hardship. One common test is the Brunner test.
This evaluation requires proving that:
- The debtor cannot maintain, based on current income and expenses, a "minimal" standard of living for the debtor and the debtor's dependents if required to repay the student loans
- Other circumstances exist showing that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans
- The debtor has made good faith efforts to repay the loans. (Brunner v. New York State Higher Educ. Servs. Corp., 831 F. 2d 395 (2d Cir. 1987). Some bankruptcy courts may be more flexible in the tests they impose.
Some things to keep in mind about student loan debt when considering whether filing for bankruptcy is the right decision for you:
You may be able to avoid the "higher standard" of the Brunner test if you can show that your loans are not really "educational loans" as defined by the Bankruptcy Code. For example, payments for tuition or room and board are not covered if you did not receive an extension of credit. You also had to have attended an "eligible educational institution" for the standard to apply, which means the institution must be eligible to participate in one of the government student financial assistance programs. Of course, the majority of schools do fit into this category. You should consult a lawyer (we here at Allmand Law Firm PLLC would be happy to assist) for a free evaluation to help determine whether your loans meet these definitions.
Most courts prefer to see that you have tried other options such as the income contingent repayment plan before attempting the bankruptcy process. You should definitely go in prepared to show just what other steps, if any, you have taken, or be ready to explain why none of those alternative options were appropriate in your particular case. Remember that interest will continue accruing on your student loans during the course of Chapter 13 bankruptcy . It's possible you can restructure or defer the interest that accrues during this process, but highly unlikely you can wipe it out entirely.
If you can successfully prove undue hardship, your student loans will be completely discharged. Whether or not you succeed, though, keep in mind that the mere act of filing for bankruptcy protects you from collection on all your debts until the case is resolved or the judge grants your collectors permission to start collecting again. If you do meet all the requirements of the Brunner test, consulting with an experienced bankruptcy attorney would be a good idea. They can give you a rundown on the pros and cons of filing a bankruptcy petition, assist you with filing the actual petition, and guide you through potential pitfalls along the way.
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