Student Loan Debt and Bankruptcy

Most debtors are not able to discharge or wipe out student loan debt in Chapter 7 or Chapter 13 bankruptcy.

One exception to wipe out student loan debt in bankruptcy

But, you can get rid of your student loans in bankruptcy if you are able to demonstrate that repaying your student loans would cause an undue hardship.

Procedure to Discharge your Student Loans in Bankruptcy:

You must first file a formal complaint called a Complaint to Determine Dischargeability with the bankruptcy court. You will then need to prove to the court that payment of your loans will cause an undue hardship.

Most likely a test will be used to determine undue hardship. This test varies between courts. But regardless of the test used, most courts are reluctant to discharge student loans.

Brunner Test

The Brunner Test is based on three factors. You must meet all three of these requirements:

Poverty. Based upon your current income and expenses, you will be unable to maintain a minimal standard of living for yourself and your dependents if you are forced to repay your loans.

Persistence. Your current financial situation is likely to continue for a significant part of the repayment period.

Good faith. You have made a good faith effort to repay your student loans.

The Totality of the Circumstances test examines all relevant factors in your case.

Other Options

There is also special test for Health Education Assistance Loans (HEAL). You will have to show that the loan became due more than seven years ago and repayment would cause an “unconscionable” burden on your life.

Most courts look at the undue hardship tests as all or nothing – either you qualify to get the whole loan discharged, or you do not. But some courts have discharged a portion of a debtor’s student loan.

You may have a better chance if you have very low income or your loans are from a for-profit trade school.

If payment of your loans is not found to be an undue hardship in Chapter 7 bankruptcy, you will still owe them when your bankruptcy case is over.

If you are unable discharge your student loans, Chapter 13 bankruptcy provides some other options that can help. You may be able to pay a reduced amount during your Chapter 13 plan. If this is the case you’ll still be required to pay whatever amount is left after your repayment period ends.