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For individuals with student loans and bankruptcy needs, it’s essential to know that, while it is hard to do, it is not impossible to have your student debts discharged through bankruptcy. In many situations, bankruptcy is not available as a way of discharging student loans. 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, during bankruptcy proceedings, courts consider the most types of debts.
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. If not, courts will include it 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 bankruptcy 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 five-year repayment plan that leads to the discharge of debts. However, you will still need to show undue hardship after that period for the court to discharge the loans, or you may have to continue to make payments on them.
Should You Look Into Student Debt and Bankruptcy?
You should consider the opportunities to discharge your student loans and debt if
- You have a very low paying job
- You did not benefit from the education (for example, went to a fraudulent school)
- You are facing medical 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. As always, consulting with a bankruptcy attorney will help you decide on the best path forward. Bankruptcy can help restore your financial stability and give you the “breathing room” you need to achieve your original financial goals.
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