Student Loans and Bankruptcy

Often, we are asked if filing for bankruptcy protection will help discharge student loans.   Sadly, for most people, filing for Chapter 7 bankruptcy protection will not provide the relief that they need.

Student loans are difficult, but not impossible, to discharge in bankruptcy.  To do so, you must show that payment of the debt “will impose an undue hardship on you and your dependents.”

Courts use different tests to evaluate whether a particular borrower has shown an undue hardship. A common test is the Brunner test which requires a showing that 1) the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for the debtor and the debtor’s dependents if forced to repay the student loans; 2) 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) the debtor has made good faith efforts to repay the loans. (Brunner v.New York State Higher Educ. Servs.Corp., 831 F. 2d 395 (2d Cir. 1987). Not all courts use this test. Some courts will be more flexible, some less.

Although this does not appear to be a difficult standard to meet, for the most part, most debtors are unable to get their student loans discharged. The same standards apply to both private and federal or state student loans.  Additionally, in order to obtain a bankruptcy discharge of student loans, the bankrupt debtor has to file an adversary proceeding (or a lawsuit)against the student loan creditor and have a court determine if the student loan debtor/borrower meets the criteria for discharge.   Since the adversarial process is usually an expensive and time consuming process, debtors who may meet the criteria can find themselves barred from exercising their rights due to financial limitations.

Some student loan borrowers find that Chapter 13 reorganization is useful as it may stop future interest and penalties from accruing so long as the student loan is paid in full through the Chapter 13 plan of reorganization.  To do this, debtors must have sufficient income to meet their regular monthly obligations plus have sufficient additional income to make their Chapter 13 plan payment.   Each case is different and if you are interested in exploring if a Chapter 13 bankruptcy is right for your situation, please contact our office for a free bankruptcy consultation.