Many people believe that student loans cannot be discharged in a Chapter 7 bankruptcy, but this is just not true. In limited situations, you can get rid of student loans through a bankruptcy filing.
The findings of a 2011 study were counter to what some might expect. Almost 40 percent of the borrowers who included student loan debt in a bankruptcy filing had some or all of that student debt discharged. The report did note that very few people include student loans in bankruptcy proceedings.
The cost of university has increased faster than inflation for many years. In December, CNN reported that the average debt load for an undergraduate student was $29,400. One-fifth of the debt was owed to private lenders, which often charge higher interest rates. The range of debt was quite wide from $4,450 to $49,450. A graduate degree or law degree can leave an individual with six figures of debt.
Bankruptcy law only allows for the discharge of student loans when necessary to avoid undue hardship. The bankruptcy code, however, does not define the term undue hardship. That means federal courts have stepped in and analyze the issue on a case-by-case basis.
The bankruptcy court in its undue hardship analysis reviews three criteria that have come to be known as the Brunner test. The three main questions are:
- Can the borrower sustain a minimum standard of living while repaying the loan(s)?
- Is the borrower's financial situation likely to change?
- Did the borrower make a good faith effort to repay the loan(s)?
The answers to the questions will impact whether some of the student debt may be dischargeable. An experienced bankruptcy attorney can provide individualized guidance.
Source: U.S. News, "Debunking the Student Loan Bankruptcy Myth," Betsy Mayotte, August 13, 2014.