Student loans are typically not dischargeable through bankruptcy, though there are options for debt relief in extreme situations. This also changes depending on the kind of loan that has been received. Federal loans or loans obtained through a non-profit organization like a school are unlikely to be dischargeable. However, private loans may be easier to discharge when filing for bankruptcy. It is vital to consult with a bankruptcy lawyer to determine whether applying to discharge a student loan is even possible for your specific situation. The vast majority of individuals are not eligible to discharge their student loans through the bankruptcy process, though there are multiple other options that can help ease the financial strain caused by student loan payments.
The Brunner Test
There are three conditions that courts often used to determine whether or not an individual is eligible to discharge their student loans. All three conditions must be met in order to discharge student loans. This is called the Brunner Test. It was designed to prevent students from incurring student loan debt and filing for bankruptcy immediately after graduation. The three components of the Brunner Test are:
- Proving that you can’t maintain a minimal standard of living for yourself and your dependents based on your current income and expenses.
- Proving that your financial situation is unlikely to change during the loan’s terms. This may include proving some medical condition that prevents you from obtaining an additional job.
- Proving that you made good faith efforts to repay the loans, though this doesn’t necessarily indicate making payments. It can include searching for an affordable repayment plan or contacting your existing loan provider.
Though the Brunner Test is commonly used by a court during the bankruptcy proceedings, there are a few other tests that may be implemented to determine eligibility for student loan discharge. The Totality of the Circumstances Test, for example, looks at all relevant factors in the situation. This is done to determine if paying student loans will cause undue hardship to the quality of life of the individual. Undue hardship can be difficult to define and is largely up to the ruling of the court. It can be useful to look at the past history of the court to determine the likelihood of success.
An Adversary Proceeding
Essentially, student loans are generally not looked at as dischargeable assets during the bankruptcy process. In order to bring student loans into the mix, an adversary proceeding must be filed along with the bankruptcy. To prepare for filing an adversary proceeding, it will be important to ensure that you have made a good faith effort to repay the debt. This means that you need to document communication with your lender to show that you made an effort to adjust the payment plan. These proceedings are separate proceedings from the regular bankruptcy processes, though they will occur in conjunction with the process.
Chapter 13 Bankruptcies
Chapter 13 bankruptcies generally include implementing a reasonable payment plan that will allow you to repay your debts. This may similarly help to lower your student loan payments. However, in most situations, you will still be responsible for the remaining debt after your repayment plan has concluded. This is different from dischargeable assets, which are generally discharged after all of the payments in the plan are made.
Chapter 7 Bankruptcies
Through a Chapter 7 bankruptcy, the student loan debt may be discharged completely, though this is extremely uncommon. Chapter 7 bankruptcies generally sell off assets to repay debts and the remaining debt is frequently discharged. The ideal type of bankruptcy to file for will depend primarily on the overall situation, so it is important to consult with an experienced legal professional when undergoing the bankruptcy process. There are many different types of bankruptcies, though Chapter 13 and 7 Bankruptcies tend to be the most common for individuals.
Essentially, when you attempt to discharge your student loans, there are three possible outcomes. The first possibility is a complete discharge of student loans. In this situation, you will no longer be responsible for any remaining student loan debt. The second potential outcome is a partial discharge of the loan. This will result in a portion of the debt becoming discharged, which will reduce the total amount of debt and often the overall payments. They may also reduce the interest rate of the applicable loan. The final, and most common, outcome is no discharge of student loan debt, which will cause you to still be responsible for the student loan debt, even after completing the bankruptcy process.
Federal loans are usually not dischargeable due to the availability of Income Driven Repayment Plans. These plans take your income into consideration and design a corresponding repayment plan, which may be a percentage of the total income or other consideration. This can cause the monthly payment to be as low as $0. $0 will not affect your standard of living, so it can be difficult for a court to justify discharging federal student loans.
There are several other options to minimize the financial strain of student loan repayment. For example, deferment is a possibility for student loans. Deferment essentially temporarily stops payments and may prevent the necessity of paying the cost of interest during the deferment period. Forbearance can stop loan payments from being required for up to a 12 month period. However, this method does require payment of the interest accrued during this time. The availability of alternative repayment plans is often why it is so difficult to discharge student loan debt during bankruptcy.
Contact us for your Bankruptcy Needs
Bankruptcy should be used as a last resort for financial hardship. It has significant legal, personal, and economic consequences. Bankruptcy can remain on your credit for 10 years, which can prevent you from securing future loans. Due to the dramatic impact of filing for bankruptcy, it is important to consult with a knowledgeable bankruptcy lawyer. To obtain superior legal counsel regarding your bankruptcy, contact us at LeBaron & Jensen today!