You may be one of the many Americans that make up for the 1.56 trillion dollars of student loan debt in America in 2020. So, how do you get rid of the debt? Can a bankruptcy discharge alleviate your student loan hardship. Let’s find out.
Can You File Bankruptcy On Student Loans?
It is difficult for student loan debts to be dischargable in bankruptcy. Student loan debt is a significant financial burden for millions of individuals in the United States. According to 2020 figures, approximately 45 million people owe a total of $1.6 trillion in student loan debt. Student loans are second only to mortgage loan debt. One of the most commonly searched bankruptcy questions is, “Can I get rid of student loan debt in bankruptcy?” The answer is, “maybe.”
I) Why is it Difficult for Student Loans to be Dischargeable in Bankruptcy?
Student loans are one of the few unsecured debts that are not eligible for a bankruptcy discharge (debt forgiveness). If you file a bankruptcy case, you likely will continue to owe your student loans. However, there are exceptions to that rule. Some individuals can qualify for a hardship discharge of student loans. However, you must petition the court for the student loan discharge and meet all requirements under the Brunner Test.
II) How Can I Discharge Student Loans in Bankruptcy?
The Brunner Testis a set of three requirements that a debtor must meet before discharging student loan debt in Chapter 7 bankruptcy. The requirements are based on the findings in a 1987 bankruptcy case (Brunner vs. New York State Higher Education Services, Corp.). In the Brunnercase, the bankruptcy judge used a three-prong test to determine if the debtor could discharge student loan debt. Other bankruptcy judges have adopted the Brunner Testin other cases. The requirements to discharge student loan debts are:
1. Minimal Standard of Living Test
The first element determines whether the debtor can maintain a minimal standard of living for the debtor and the debtor’s dependents if the debtor continues to repay the student loan. If the answer is yes, the court concludes that the student loan debt is not dischargeable in bankruptcy. If the answer is no, the court moves to the second element.
2. Continuation of Current Financial Situation
The second element analyzes whether the debtor’s current financial situation is expected to continue for the majority of the remaining term of the student loan contract. For example, is the debtor now disabled and will not be able to return to work? Or, is the debtor earning near the maximum income expected based on the debtor’s age, career, education, skills, and other factors? If the debtor’s current financial situation is expected to improve during the term of the student loan, the judge may not grant a discharge of student loan payments.
3. Good Faith Effort
If the debtor passes the first two tests, the judge determines whether the debtor has made a reasonable effort to repay the loans. If so, the judge may grant a bankruptcy discharge for student loans.
III) Defining Undue Hardship and Good Faith Effort
Unfortunately, there is not a standard definition for what constitutes an undue hardship or a good-faith effort. Judges use various methods to determine whether student loan payments create undue hardship that prevents a minimum living standard. Likewise, judges have interpreted the good faith effort in various ways.
Working with a bankruptcy lawyer can be helpful. A local bankruptcy attorney is familiar with the bankruptcy judges and cases decided in that district. Therefore, the attorney understands the standards used by the bankruptcy judges to decide motions to discharge student loans. Furthermore, a bankruptcy attorney can draft a motion and present a case that gives you the best possible chance of success based on your unique circumstances.
IV) How to Pay Student Loan Debts?
There could be several non-bankruptcy options to handle your student loan debts. If you are struggling with student loans, you may want to research the following repayment options.
- Student Loan Consolidation
- Pay As You Earn Repayment Plan
- Graduated Repayment Plan
- Refinancing Student Loans
- Income Contingent Repayment Plans
- Student Loan Forgiveness
- Revised Pay As You Earn Repayment Plan
- Income-Based Repayment Plan
If you experience a short-term financial hardship, you might qualify for a student loan deferral or a forbearance. The deferral or forbearance may provide temporary relief from student loans until you recover from a financial crisis.
Chapter 13 Bankruptcy and Student Loans
If you cannot discharge student loans through Chapter 7, you can obtain some relief through Chapter 13. During your Chapter 13 case, your student loan payments are deferred. They continue to accrue interest, but you are not required to pay the loan payments until your case is completed. Some debtors choose to continue paying their student loan payments in full or part during the Chapter 13 case. Other debtors wait until their bankruptcy plan is finished to resume payments. By discharging other unsecured debts through Chapter 13, debtor is in a better financial position to repay their student loan after the Chapter 13 discharge.