Posted on: 10 May 2016
If you are struggling with student loan debt and are unable to meet your other financial obligations, you may be think the debt will follow you to your grave. You've probably been told that student loans cannot be forgiven in bankruptcy and have closed the door to that solution. However, the good news is that under some circumstances student loan debt can be discharged in bankruptcy. Find out if you are likely to qualify and what you need to do about it.
When can student loan debt be discharged in bankruptcy?
According to Nolo, an online legal information site, discharging student loan debt is not a common practice, but if you can demonstrate that repaying the loans will cause an undue hardship to you and your family, a judge can deem them dischargeable.
What is an undue hardship?
An undue hardship exists when paying your student loan debt makes it impossible to maintain a minimal standard of living for yourself and your dependents. This means you cannot pay for basic living costs, such as food, shelter, clothing, and medical care if you pay your student loan payments. Bear in mind that even though you are unable to pay your current living expenses, this does not necessarily indicate that you face an undue hardship. If you are making payments on a luxurious house and expensive vehicles, for example, the fact that you do not have enough money left over to pay your student loan obligations is not likely to be seen as a hardship.
How do you prove an undue hardship?
How courts calculate an undue hardship varies between courts, but most will use one of the two standards "tests" to determine if you qualify.
1. The Brunner Test—In order for your circumstances to qualify as an undue hardship, you must meet all of the following criteria:
- Good-faith effort: You must show that you have made an effort to pay your student loan debt. If you have not made any payments or have not attempted to make arrangements to make the payments, you likely will not qualify.
- Poverty: Your earnings must be too low to provide a minimal standard of living. In practical terms this means you cannot pay your rent and utilities and provide for your family on your income if you pay your student loan payments. The poverty guidelines published by the US Department of Health and Human Services may be used, but the court may use other data to determine the poverty level in your area.
- Longevity: Your situation must be expected to continue for the major portion of your repayment period of your student loans. If you are temporarily unemployed or suffer short-term financial difficulties, you do not qualify.
2. The Total Circumstances Test—This test looks at all aspects of your life that may affect your ability to repay your student loans. It may include your work history, your health, whether you are disabled, and your spouse's income and ability to provide for your children. Courts are free to use other tests, if they choose.
What do you do if you think you qualify for an undue hardship?
You will need to file a complaint, called a Complaint to Determine Dischargeability, with the court to determine if you will be allowed to discharge student loan debt during bankruptcy.
Can you still file bankruptcy if your student loan debt is determined non-dischargeable?
If you have significant debt other than your student loan debt, you can still file bankruptcy to get relief from your debtors. You will still be responsible for making your student loan payments, even after filing bankruptcy, unless it was deemed dischargeable.
If your major source of debt is your non-dischargeable student loan debt, bankruptcy may not be the best solution for you at this time. Talk to a bankruptcy attorney from a firm like Wiesner & Frackowiak, LC and discuss all your outstanding debts to determine whether filing bankruptcy is in your best interest.Share