Student Loans & Bankruptcy

The purpose of bankruptcy is to find a way forward with people who have large amount of debt while treating their creditors in a fair and equitable manner. The debtor often sees this process as a “fresh start” without the specter of looming bills.

Because it is an expensive and difficult process, not many people attempt to discharge student loans in bankruptcy. However, that might be altering.

Yes, bankruptcy does allow for student loan discharge. However, the majority of bankruptcy attorneys warn those filing for bankruptcy that the procedure is time-consuming and expensive, and bankruptcy judges only temporarily discharge student loan debt in exceptional circumstances.

However, if the student loan crisis worsens, the story shifts, and bankruptcy judges may soon see an increase in the number of bankruptcy filings asking for student loan debt discharges. Learn:

When may you declare bankruptcy to pay off school loans?

What happens if you can’t discharge your student loans in bankruptcy and how the student loan discharge process works.
Once you have a general understanding of how the student loan discharge procedure operates, see a bankruptcy attorney with knowledge of student loan discharge to learn more about student loan discharge in your area.

Can Student Loans Be Included in a Bankruptcy?

Yes, however a typical bankruptcy filing does not include the cancellation of student loans. Even if you take the additional measures necessary to discharge student loans, there is no certainty the bankruptcy court will actually do so.

How Student Loans Are Forgiven

You can “discharge” or “erase” many different sorts of debt by filing for bankruptcy, including credit card debt, medical debt, phone and utility bills, overdue rent, and personal loans. If you give the house or automobile back to the lender, you could potentially have your mortgage or car loan forgiven.

But bankruptcy does not erase all debts. For instance, filers cannot dismiss debts from fraud or support responsibilities. The “nondischargeable debt” category includes student loans as well, but they’re a little different. Although it is possible, student loan discharge is not a given.

All bankruptcies begin with the filing of bankruptcy documents with the court, which identify every obligation you owe, including student loan debt. In a typical Chapter 7 proceeding, the bankruptcy discharge order that erases your debts would be delivered to you four months later, but it would not include your school loans. You would still be obligated to pay them after the bankruptcy court closed your case.

Why is that so?

If you submit a separate adversary complaint to the bankruptcy court, the bankruptcy court will schedule a separate bankruptcy trial, sometimes known as a “adversary proceeding,” for the purpose of discharging student loans. The lawsuit is served on your loan provider and given a different case number from your bankruptcy proceedings.

The trial is conducted before a bankruptcy court, and the adversarial litigation includes a discovery period during which each side asks information from the other. The loan provider offers a defense, and you submit facts supporting your position.

The standard your bankruptcy court will apply to determine what you must prove in order to succeed at trial will vary.

Making a Case for the Release of Student Loans in Bankruptcy Court

You must primarily demonstrate your incapacity to make enough money to pay back your college loans with all of the examinations. If you can’t prove it another way, be ready to bring in an expert. The details of each test are listed below.

The Case of Unjustified Difficulty

You must demonstrate an excessive hardship to repay your student loans in order to pass this exam. Depending on the court, the standard may be all-or-nothing in some cases. Either you are eligible to discharge the entire student loan or you are not. Some courts will forgive a borrower’s student loan in part.

Brunner’s Test

If you satisfy all three of these conditions, you may be eligible for a student debt discharge under this standard:

Poverty. If required to repay your debt, you wouldn’t be able to support yourself and your dependents on a modest standard of living based on your present income and expenses.
Persistence. The majority of the repayment time is likely to be spent in your current financial status.
decent will. You have attempted in good faith to pay back your student debt.

The Test of the Totality of the Circumstances

The totality of the circumstances test is employed by other courts. If it will be an unreasonable burden for you to repay your student loan, the court will consider all pertinent circumstances in your case.

Other Tests for Student Loan Discharge

There are other tests as well, such as one specifically for HEALs (Health Education Assistance Loans). You must demonstrate that the loan’s repayment would put a “unconscionable” burden on your life and that it became due more than seven years ago. Speak with a local bankruptcy attorney to learn more about the test applied in your area.

What Will Happen If the Bankruptcy Court Denies Your Student Loan Discharge?

If you can’t demonstrate that paying back your student loans will put an undue strain on your finances, you’ll still owe them after filing for Chapter 7 bankruptcy. However, Chapter 13 bankruptcy offers additional assistance.

For instance, you could be able to pay less during your Chapter 13 plan, but you’ll still be responsible for paying the balance when your payback time is over. Additionally, find out from your bankruptcy attorney if Chapter 13 will disqualify your income-dependent plan.

Need Additional Bankruptcy Support?

Did you know that for more than 50 years, Nolo has made the law simple? It is accurate, and we want to make sure you get what you need. More articles outlining the bankruptcy process are provided below. In addition, if you have any more inquiries, our bankruptcy site is the best place to start.