Student loans are a different animal when compared to other loans and obligations. In a bankruptcy, consumers can use either of two chapters of the bankruptcy code, Chapter 7 or Chapter 13, to deal with most of their debts. A Chapter 7 is a liquidation where you are able to discharge unsecured debt such as credit cards, medical expenses and second mortgages while retaining most if not all of your personal property. A Chapter 13 is a reorganization or repayment process where you pay your debts, usually on a reduced basis, over a 3 or 5 year period. The question for many students who are considering bankruptcy as a way to get rid of overwhelming student loan payments is whether they are dischargeable in a bankruptcy? Unfortunately, the simple answer for most individuals is no.
But, there is an exception under certain circumstances where you can discharge your student debt if you can prove poverty, a disability that prevents you from working at your chosen profession or at all, or if you matriculated at a for-profit institution. Depending on which jurisdiction you are planning to file your bankruptcy petition, the courts will use certain tests to determine if your debt should be eliminated.
The Brunner Test
Using this test, a court will look at the following factors:
- If your current income and expenses are unlikely to change at any time in the foreseeable future
- If you cannot meet a minimum standard of living for yourself and family or other dependents
- And if you have attempted to pay your student debt over a reasonably long period and can show a good faith effort to do so
You may have to show that the industry in your chosen field is suffering, outdated, is saturated or does not show much promise for growth, causing you to look for or become employed in a less lucrative field.
Totality of the Circumstances
Essentially, the court will look to see if you have an undue hardship that is preventing you from repaying your student debt. Having a disability or being the person financially responsible for dependents with special needs or who have serious medical issues and expenses may be considered as well.
If you cannot demonstrate an undue hardship or fit within the Brunner Test criteria, then a Chapter 13 can at least offer you relief for a few years. By filing under Chapter 11, which offers a repayment plan of your debts over a 3 or 5 year period, you can reduce your student loan payments over that period of time. When the payment plan expires, you will hopefully be in a better financial situation or you can attempt once again to qualify for discharge of your student loan.
In lieu of bankruptcy, there are other options that can reduce your student loan principal or eliminate it after a certain time, to learn more about your options contact DCDM Law Group. One federal program allows for discharge of the loan after 10 years of on-time payments if you work in a qualifying field such as government, the military, public service, public education, public health and others. The federal government and some states also offer a number of other loan forgiveness or income based repayment programs if you meet their qualifications.