A common question from many of my clients is whether they can get rid of student loans through bankruptcy. With the costs of school very high and the prospects for finding work after obtaining a degree being so low, many people are asking themselves how they can get rid of student loan debt. While difficult, it is not impossible to eliminate student loan debt in bankruptcy.
Student loans are generally non-dischargeable unless a debtor can show undue hardship.
Is it an undue hardship? To many bankruptcy clients, the automatic answer is that yes, student loans are an undue hardship. When balanced against every day debts and the fact that some graduates have not been able to find work even though it is time to pay on the debts, the thought of paying on student loans can be overwhelming. However, you must be able to pass the court’s evaluation of whether or not student loans are an undue hardship on you and your dependents. The most common test is called the Brunner test. First, you must show that you cannot maintain a minimal standard of living based on your current income. Second, the court will look to see if there may be extenuating circumstances that are likely to persist for a significant portion of your repayment period. Third, the court will cosnider whether you have made ‘good faith efforts’ to repay your loans. If you are able to meet all three prongs, then the judge may discharge your loans.
Passing the test is difficult, but there are other options. If you file a chapter 13 bankruptcy, your student loans will be paid back along with your other debts in your repayment plan. It may seem redundant to pay loans through a plan, however, many people find that it can actually offer them a savings while the plan is being paid out and will stop any garnishment efforts or creditor harassment. Additionally, many people find that it is a relief that collection efforts cannot be pursued while you are within the three to five year time period the payment plan is in effect. You will still be liable for any balance due on the loans after bankruptcy has been discharged, however, you also have the option to ask the courts to complete a new undue hardship test at that point. If you pass at that point, then the student loans may be discharged.
If you or someone you know has a question about discharging their student loans, give us a call at (877) 346-7411.