For individuals with student debt and bankruptcy needs, it’s important to know that, while it is hard to do, it is not impossible to have your debts discharged through bankruptcy. In many situations, bankruptcy is not available as a way of discharging student loans. In order for this to happen, you will need to show proof that the debt will impose some level of undue hardship on you and your dependents, as the Bankruptcy Code states. How can you do this?
Is Student Loan Debt Discharged During Bankruptcy?
The short answer to this is, no. In most situations, student debt and bankruptcy do not relate. Student loans, such as those backed or financed by the federal government, are protected from bankruptcy discharge. Most attorneys and lenders will tell you this.
However, if you can prove undue hardship, you may be able to file for Chapter 7 or Chapter 13 for help. It’s important to remember that the benefit and goal of bankruptcy are to provide individuals with a fresh financial start. For this reason, most types of debts can be considered during the bankruptcy by the court.
What Is Considered Undue Hardship?
There are several ways to prove undue hardship. One of them is through the Brunner Test. This test will provide some essential information such as:
- It indicates that you cannot maintain, based on the income and expenses you currently have, even a minimal standard of living for you and your dependents if you have to repay the student loan debt.
- It will also show additional circumstances that this financial state will go on for an extended period.
- And, it will demonstrate that you have made every effort possible to repay your loans in good faith.
The Brunner Test isn’t easy to pass, but it is the most commonly used test by the Court to determine if you can or cannot repay your student loan debt, and, if not, that it should be included in bankruptcy filings.
Student Loans in Chapter 7
If you pass the Brunner Test, it is often beneficial to file Chapter 7 bankruptcy. Passing the Brunner Test will discharge your debt from your student loans as well as any other unsecured debt you have. It is often the most common option should you pass the Brunner Test.
Student Loans in Chapter 13
For those with student loans and bankruptcy through Chapter 7 isn’t an option, Chapter 13 may help. You may be able to work with the Court to set up a repayment plan through this form of bankruptcy that will make it easier for you to repay your debt on your student loans. This is often a three to a five-year repayment plan that leads to discharge of debts. However, you will still need to show undue hardship after that period for the loans to be discharged or you may have to continue to make payments on them.
Should You Look Into Student Debt and Bankruptcy?
If you have student debt, perhaps you have a very low paying job, or you can prove that you did not benefit from the education, went to a fraudulent school, or are facing medical debt, you should consider the opportunities to discharge your debt. If you’ve already filed for bankruptcy without requesting that the Court considers undue hardship, you can reopen your case to allow the Court to take a closer look. It is often beneficial to do so.