Are your student loan debts dischargeable in bankruptcy? As with so many topics related to this important financial process, the answer isn’t necessarily always cut and dry.
We hope you brought an apple and a number two pencil, because it’s time to get a little schooling on student loans and bankruptcy.
The Growing Impact of Student Loan Debt in the US
For many millions of consumers, student loan debt is one of the biggest factors holding them back from buying a home, moving to new city, or making another big ticket financial decision. The debts incurred from higher education can be incredibly restrictive, acting as a weight that holds young adults in place, just when they want to begin truly moving forward in their financial lives.
And student loan debt has become a major issue over the last few years. According to recent reports, total student loan debt in the US sits around $1.4 trillion as of late 2018. For reference, that’s greater than total credit card debt, which was estimated to be around $1 trillion in 2018, according to data from the Federal Reserve Bank of New York.
And that’s not all. Per 2017 findings from Pew Research, about four in ten adults under age 30 have student loan debt; roughly a quarter of borrowers owe $43,000 or more; and young adults with loans are statistically more likely to report being “financially struggling” than their peers without loan debts.
This is all significant. And for the many millions of adults grappling with the heavy burden of student loan payments, it leads to one common question: “Is bankruptcy an option for me?”
Discharging Student Loan Debts in Bankruptcy
Is it possible to discharge your student loan debts in bankruptcy? The short answer is that student loans are fairly difficult to discharge – but it is not necessarily impossible.
Certainly, you should keep in mind that student loans are not automatically dischargeable. And in order to have them considered, you’ll likely need to file a second proceeding during bankruptcy.
Here’s what you need to know: Prior to 1976, student loan debts could be discharged fairly easily. But, as this great Forbes article spells out, Congress changed the law, essentially making it so that student loans would not be dischargeable unless the consumer had been making payments for a significant period – five years, and then, later, seven years. Eventually, the law “removed dischargeablility except if a debtor could show that paying back the student loans would create an undue hardship,” according to Forbes.
That last clause – “create an undue hardship” – is where the possibility of hope comes in for debtors.
Proving Financial Hardship with the Brunner Test
Essentially, during bankruptcy, you may be able to file a secondary petition, known as an adversary proceeding, to have your student loans dismissed, provided that you can prove that they create substantial “undue hardship.”
While the exact specifics may change from state to state, and even court to court, the standard test to determine “undue hardship” is known as the Brunner test, and it evaluates your situation based on a number of criteria:
- Would continuing to make student loan payments prevent you from maintaining a minimum standard of living, based on your current income and expenses?
- Do additional circumstances exist, indicating that your current state of affairs is likely to persist for a significant portion of the repayment period for your loans?
- Have you made “good faith” efforts to repay your loans?
If you and your legal team can successfully prove undue hardship under the standards set by the Brunner test, your student loan debt may be cancelled.
As that same Forbes article points out, a sampling of 50 current and past bankruptcy judges found that “ some judges may be more open to helping debtors” with student loans. And as consumer information site NerdWallet details:
“Of people who filed for bankruptcy in 2007 and had student loans, only an estimated 0.1% attempted to have their college debt discharged, according to a study published in the American Bankruptcy Law Journal in 2012. But of the 207 cases the study examined, 39% got full or partial student loan discharges.”
Another thing to keep in mind? Even if you are not necessarily able to discharge your student loan debts, bankruptcy may still be a viable option worth considering for you, depending on your circumstances.
With a Chapter 13 reorganization bankruptcy, for instance, debtors create a long-term plan to repay their creditors, under the supervision of the court. This may allow you to restructure your loans, or give your student loans greater priority under your repayment plan, which could make your day-to-day financial situation easier to manage. Even with Chapter 7, or liquidation bankruptcy, the ability to have some of your other debts discharged may make your remaining student loan debt easier to handle with time, allowing you to move forward on surer financial footing.
The Importance of Asking for Help
If you are considering bankruptcy as an option for debt relief, or have any questions about setting yourself up for success down the line, it’s vitally important that you consult with an experienced bankruptcy attorney.
Working with an attorney can help you determine if you qualify for bankruptcy, and, if so, which type. Your attorney can help you devise a strategy for attaining maximum success from your bankruptcy proceedings, and may even be able to offer counseling and guidance on alternative strategies, if bankruptcy isn’t the right option for you.
The bankruptcy process can be long and complex – but it gives countless consumers a fresh financial start, offering a much-needed “light at the end of the tunnel.” If you have any questions or concerns, don’t hesitate to get in touch with the attorneys and staff of the Gunderson Law Firm for your free initial consultation.
