Student Loan Bankruptcy Is A Difficult Process

Student loan debt usually cannot be discharged in Chapter 7 or Chapter 13 bankruptcy. However, debtors who can prove that repaying student loans would cause an undue hardship can get rid of student loans in bankruptcy.

Consider Student Loan Repayment and Forgiveness Options

Bankruptcy on student loans can be filed. But is that the best course of action? Maybe.

Bankruptcy is a complicated, intrusive and extensive process.

It’s difficult to discharge student loans through bankruptcy, and it may be wise to steer clear of utilizing this option, as it is the most drastic option for debt resolution. It can often can be easily avoided with simple solutions that may not be obvious when saddled with a lot of student loan debt.

There are also many alternatives to bankruptcy. For example, federal student loans come with options such as income-driven repayment plans and deferment or forbearance.

There is also the option to apply for forgiveness, either through an income-driven repayment plan or Public Service Loan Forgiveness (PSLF). PSLF is available to those who work for certain public service organizations, such as government agencies or non-profits.

And if the loans are privately held, the lender might have options, such as a hardship program. Remember, nothing is lost by inquiring.

Before declaring bankruptcy and trying to fight against a system that’s designed not to discharge student loan debt, be sure to research other debt repayment options for student debt relief.

But if you decide to pursue bankruptcy, it helps to know what to expect…

The ‘Undue Hardship’ Exception

To get a student loan discharged in bankruptcy, it must be shown that paying it would be an undue hardship. The test determining undue hardship varies between courts. Many courts consider the undue hardship test as all or nothing: debtors either qualify to get the whole loan discharged, or they don’t get any relief at all. Other courts are willing to discharge a portion of a debtor’s student loan.

Regardless of the test criteria, most courts are highly reluctant to discharge a student loan. However, for those with low income, or if a loan is from a for-profit trade school, chances increase.

The Brunner Test

Many courts use the Brunner test. Under this standard, a student loan can be discharged if all three of these factors are met:

  • Poverty. Based upon current income and expenses. It must be shown that if the debtor is forced to repay the loan, they will not be able to maintain a minimal standard of living for themselves and their dependents.
  • Persistence. A debtor’s current dire financial situation is likely to continue for a significant portion of the repayment period.
  • Good faith. Debtor has made a good faith effort to repay the student loan.

Other courts use the Totality of the Circumstances test. The court considers all relevant factors in the case to determine if it is indeed an undue hardship to repay the student loan.

There are other tests, such as a special test for Health Education Assistance Loans (HEAL), in which a debtor demonstrates that the loan became due more than seven years ago and repayment would impose an “unconscionable” burden on their life.

There are several other tests, as well. To find out the tests used here in Minnesota, contact me and we can discuss your situation and options.

Procedure to Discharge a Student Loan in Bankruptcy

To discharge a student loan via bankruptcy, an adversary proceeding must be filed to determine dischargeability with the bankruptcy court. Evidence must be presented to prove to the court that payment of the loans will cause an undue hardship. It’s likely that an expert would be needed to testify about a debtor’s ability to be gainfully employed in the future. Following the two steps listed below may help you achieve your goal of getting student loan debt wiped away.

1) Find a lawyer

Technically, a lawyer is not required to file bankruptcy, but student loan bankruptcy can be an exceeding complex process filled with many potential pitfalls. Doing it alone could mean extra time, incorrect filings, and ultimately losing a case that could have been won.

2) Follow the steps the lawyer outlines

Next, a bankruptcy attorney  will help determine whether to file for Chapter 7 or Chapter 13 bankruptcy. Below is a quick breakdown of both:

Chapter 7 bankruptcy

  • Debtor must prove little or no disposable income available to pay off the debt
  • Most unsecured debt can get wiped out
  • Student loan debt may be eligible for discharge
  • The process can take three to five months

Chapter 13 bankruptcy

  • Debtor has some income to use to repay some of the debt
  • Debt will be restructured, and some of it will need to be repaid
  • Student loan debt may be eligible, but repayment will be restructured, not discharged
  • The repayment plan could last from three to five years

The lawyer will file a petition called an adversary proceeding to get a determination of undue hardship (this is unique to bankruptcy and student loans).  A student loan bankruptcy cannot proceed without this step.

Once all the proper paperwork is filed, the attorney will advise on next steps. what happens next. These steps vary depending on the situation and the type of bankruptcy.

Raising Defenses to Student Loan Debt in Bankruptcy

If a debtor attended a vocational or trade school, they might have defenses to payment of the student loan debt. Examples include breach of contract, unfair or deceptive business practices, or fraud. If successful, the debt will be wiped out, making the discharge issue moot.

What Happens If Your Student Loans Aren’t Discharged?

If, as in most cases, student loans are not discharged in bankruptcy, here’s what happens.

  • Chapter 7 bankruptcy. In Chapter 7 bankruptcy, if payment of the loans is not an undue hardship, they will still be owed them when the bankruptcy case is complete.
  • Chapter 13 bankruptcy. If student loans cannot be discharged, Chapter 13 bankruptcy provides other option. For example,  a reduced amount might be possible during a Chapter 13 plan, although the debtor will still have to pay the remaining amount after the repayment period ends.

Consult with an Attorney

The Brunner test or other standards are applied to Chapter 7 and Chapter 13 debtors in lots of court cases. Knowing how the court ruled previously could help determine the likelihood of successfully discharging student loan debt.

If there is a substantial amount of student loan debt, it might be worthwhile to consult with a local bankruptcy attorney.

For a more detailed explanation of your student loan bankruptcy options, let’s schedule a consultation today.

Moshier Law Office, PLLC
St. Paul, Minnesota