Dealing with overwhelming student loan debt can be daunting, leading many individuals to consider bankruptcy as a potential solution. Before you file for bankruptcy to try to get out from under student loans, it’s important to talk to a bankruptcy lawyer in your area. Whether you can discharge some of all of your student loans depends on several factors, as our friends from Eric Lindh Foster Law, LLC, note.
Understanding Bankruptcy And Student Loans
In the United States, student loans are generally not dischargeable through bankruptcy except in cases of undue hardship. This is primarily due to legislation passed in 1976 that made it more difficult to discharge federal student loans. To discharge student loans in bankruptcy, debtors must prove that repaying the loans would impose an undue hardship on them and their dependents.
Undue Hardship Standard
The “undue hardship” standard is the central criterion used by bankruptcy courts to determine whether student loans can be discharged. Courts typically apply a three-part test known as the Brunner test to evaluate whether a debtor qualifies for a discharge:
- Poverty: The debtor must demonstrate that they cannot maintain a minimal standard of living for themselves and their dependents if forced to repay the loans.
- Persistence: The debtor must show that their financial situation is likely to persist for a significant portion of the repayment period.
- Good Faith Effort: The debtor must prove that they have made a good faith effort to repay the loans, such as by exploring repayment options and negotiating with lenders.
Meeting all three prongs of the Brunner test can be challenging. Courts have set a high bar for proving undue hardship, and each case is evaluated on its individual merits.
Types Of Student Loans
Both federal and private student loans are subject to the undue hardship standard, although federal loans typically have more repayment options and forgiveness programs outside of bankruptcy. Private student loans, which are issued by banks, credit unions, and other private lenders, are generally more difficult to discharge than federal loans.
Bankruptcy Chapters And Discharge
Discharging student loans is especially challenging under Chapter 7 bankruptcy, which involves liquidating assets to repay creditors. Chapter 13 bankruptcy, which involves restructuring debts under a repayment plan, also imposes strict requirements for discharging student loans.
Alternatives To Discharge
While discharging student loans through bankruptcy is rare, debtors facing financial hardship may explore other options:
- Income-Driven Repayment Plans: Federal student loans offer income-driven repayment plans that adjust monthly payments based on income and family size.
- Loan Forgiveness Programs: Public service loan forgiveness and other forgiveness programs may provide relief for federal student loans under specific conditions.
- Deferment or Forbearance: Temporary pauses on loan payments may be available for borrowers facing short-term financial difficulties.
Consulting With A Bankruptcy Attorney
While discharging student loans through bankruptcy is challenging, it is not impossible. Debtors facing severe financial hardship should consult with an experienced bankruptcy lawyer to explore all available options and determine the best approach for managing student loan debt.
