Student loan debt in the United States has reached the $1 trillion amount and continues to grow everyday. You may be struggling with the overwhelming debt and wonder, can bankruptcy help me and what are my options?
First, can bankruptcy discharge student loans?
In short, technically yes, but in reality, no. The standard for wiping out student loans in bankruptcy is referred to as undue hardship. At first glance undue hardship seems like something that most people qualify for when they’re filing bankruptcy. Especially in a chapter 7 bankruptcy, the person (debtor) filing has no money left to pay creditors after paying their necessary living expenses and you would think that they qualify for discharge of their student loans under the “undue hardship” standard. However, when analyzing the most common court standard to determine dischargeability, the courts may use the Brunner test.
The Brunner test states that you must show:
- (1) that the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for herself and her dependents if forced to repay the loans;
- (2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and
- (3) that the debtor has made good faith efforts to repay the loans. For the reasons set forth in the district court’s order, we adopt this analysis. The first part of this test has been applied frequently as the minimum necessary to establish “undue hardship.” see (Brunner v. New York State Higher Educ. Servs. Corp., 831 F. 2d 395 (2d Cir. 1987)
As you can see the “undue hardship” standard appears to turn in to an impossible standard that very few can meet. Some courts though have allowed debtors to extinguish their student loans when they have shown that they have made a good faith effort to repay but simply cannot due to the foreseeability of repayment in the future.
What’s the process for determining if you can wipe out your student loan debt?
After you file your bankruptcy proceeding, you will need to get an attorney to file an adversary proceeding to determine the dischargeability of the debt. An adversary proceeding is a lawsuit within the bankruptcy that is asking the bankruptcy court to make a determination or ruling on a specific instance.
Since the Bankruptcy Code under 11 U.S.C. §523 (a)(8) provides that debts arising from an educational benefit of the debtor are not dischargeable, the adversary must be filed to make a determination that the debt constitutes and undue hardship on the debtor.
I have an educational loan from a private bank, can I get relief in bankruptcy?
The Bankruptcy Code does not distinguish who holds the debt, if the debt was for an educational benefit, the debt will come under the standard of undue hardship.
I have a loan from a trade school or unaccredited vocational school.
A loan from those types of schools may be able to be discharged in a bankruptcy. Contact a local bankruptcy attorney if you think you have that type of loan.
So are you saying that bankruptcy cannot help me with my student loans?
Not necessarily. Even if you have student loan debt that may not be able to be wiped out, a bankruptcy could provide you some relief.
If you choose to file a Chapter 13, your Chapter 13 may pay a dividend to unsecured creditors and your student loans may receive some money. If you only have student loan debt, a chapter 13 could pay off all of your student loan debt over the 3 to 5 year commitment period and you come out of the bankruptcy with little or no student loan debt. At the very least, you likely will not have to pay your student loans while you’re in the Chapter 13 because doing so would constitute a preference payment.
If you choose to file a Chapter 7, the student loan creditor likely will not seek payment while you’re in the bankruptcy since doing so would violate the automatic stay. When you get your Chapter 7 discharge after 4 to 6 months from filing, the only debt that you do have after the discharge would be the student loans. In this situation, the debt is more manageable.
Non-bankruptcy student loan repayment options:
Today, the student loans backed by the government offer many attractive options that you should consider.
- Standard repayment
- Graduated repayment
- Extended repayment
- Revised Pay as You Earn
- Pay as You Earn
- Income Based Repayment
- Income Contingent Repayment
- Income Sensitive Repayment
The best advice is to contact your student loan provider either online or via phone and stay ahead of their collection activities. Do not wait until they are garnishing you or sue you to pay them as some of the previously mentioned repayment options may not be available at that time.
Sims Law, PLLC
This Blog/Web Site is made available by the lawyer or law firm publisher for educational purposes only as well as to give you general information and a general understanding of the law, not to provide specific legal advice. By using this blog site you understand that there is no attorney client relationship between you and the Blog/Web Site publisher. The Blog/Web Site should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.