Bankruptcy and Student Loans: What Does the Law Say?

or college graduates, student loan debt can be one of their largest monthly expenses, behind only their mortgage and car. Eliminating that payment would help those struggling under the weight of their bills eliminate hundreds or even thousands of dollars of debt each month. But when declaring bankruptcy, only .1% of bankruptcy filers attempt to have their student loans discharged, according to a study published in American Bankruptcy Law Journal. Many people considering the issue of bankruptcy and student loans assume–wrongly–that their debt is permanent, and cannot be forgiven under any circumstances. But a recent memo issued by the Department of Education indicate that isn’t necessarily the case.

According to the memo, “the U.S. Bankruptcy code (11 U.S.C. § 523(a)(8)), provides that student loans in bankruptcy can be discharged only if excepting the debt from discharge would impose an ‘undue hardship’ on the borrower.” In plain English: if your student loans are an undue hardship, then they can be discharged.

So what does “undue hardship” mean, and how is it determined? The DoE has determined that undue hardship must be considered on a case-by-case basis, which in most courts happens through the Brunner Test. The Brunner Test uses three measures to determine whether your loans are causing unbearable financial strain:

  • If you repay your loans, it will make you unable to maintain a minimal standard of living for you (the debtor) and your family (your dependents).
  • The financial circumstances that caused you to not be able to pay your student loans will probably continue through the remainder of your repayment term.
  • You have made good faith efforts to repay your student loans.

If these three conditions are met, then you could qualify for discharge, although the process for this is more complicated than getting rid of other bankruptcy debt. Your attorney needs to file a separate lawsuit, known as an adversary proceeding, against the banks that hold your loans. If you’re unemployed, ill, or have recently experienced a dramatic decrease in income, your case is more likely to be successful.

According to the study cited above, “judges grant a hardship discharge to nearly forty percent of the debtors who seek one,” so it’s worth your while to consult an experienced attorney like Central Florida’s Jeff Badgley for sound advice. Call (407) 781-0420 for a free, no-obligation consultation about your student loans and Chapter 7 or Chapter 13 filing today.

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