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Are Your Student Loans Eligible for Bankruptcy Discharge?

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student loans bankruptcy

Student loan problems?

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As student loan debt consumes more Americans, the search for solutions intensifies. One option to consider is bankruptcy. At one time, student loans were much easier to discharge in bankruptcy, then it got much harder, and now the pendulum may be swinging the other way finally.

The many benefits of bankruptcy

Filing bankruptcy can help you get a handle on your debts. Depending on the type of bankruptcy you file, bankruptcy allows you to catch up on debt or completely discharge it. No matter which you choose, Chapter 7 or Chapter 13, filing stops debt collectors from harassing you.

Credit cards, medical bills, and personal loans can be discharged completely in Chapter 7. In Chapter 13, they can be diminished or discharged. In Chapter 13, you can catch up on a past-due mortgage, vehicle loan, and other payment obligations. Both options represent a fresh financial start.

What about student loans and bankruptcy?

Bankruptcy can help with student loans in several ways. First, if you’re facing a lawsuit or other collection action for your college debt, bankruptcy can temporarily stop it and give you time to reassess and work out other options.

If you file Chapter 13, your student loans can be part of the case, and it can help you get current. If you file Chapter 7, you can explore other options. The standard for most types of bankruptcy discharge of student loans is undue hardship. If you can prove hardship, you might get a discharge.

How do you prove undue hardship?

When lawmakers wrote the bankruptcy code on student loans, they failed (likely deliberately) to specify what undue hardship means. This oversight has, arguably, caused plenty of hardship in its own right. The lack of specifics left it to the courts to decide.

The conclusions reached by the courts were often dissimilar and varied widely by district, judge, and case. We typically see three approaches.

#1 The Brunner Test

Under this test, you must show that you can’t maintain a minimum standard of living for yourself and your dependents, so repayment presents an undue hardship. You must prove your circumstances will continue this way for the life of the loan and that you made a good faith effort to pay the debt.

#2 Totality of Circumstances Test

This test examines the student loan debtor’s past, present, and anticipated future financial resources. The court considers income and reasonable living expenses and any other relevant facts. The court may discharge student loans when they see that all of the debtor’s circumstances prove they cannot pay the loans.

#3 Undue hardship on a case by case basis

This is a lot like the undue hardship applied under the Brunner Test but means you cannot pay your student loans and maintain a tolerable standard of living. That leaves a lot of room for interpretation, and student loan servicers tend to push hard against discharge no matter the circumstances even when the debtor is terminally ill, disabled, or deeply impoverished.

Bankruptcy and student loans

Things are looking up for those with unmanageable student loan debt. The courts are swinging the other way and are more open to discharge for those who request assistance. The core issue is that few people ask for help through the bankruptcy courts.

Among bankruptcy filers with student loans, less than 1% take the extra step to ask the court to reduce or discharge their debt. Of those who do ask for help, about 40% achieve success. Those odds aren’t too shoddy, but the primary issue is the lack of asking for help.

If you’re stuck with student loans you can’t pay and need financial help, consider bankruptcy as a possible solution. To find out more, read reviews from our clients, then call 1-888-234-4181. Contact the Law Offices of John T. Orcutt for a free student loan bankruptcy consultation at one of our locations in Raleigh, Durham, Fayetteville, Wilson, Greensboro, Garner or Wilmington.

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