So you spent four years, maybe longer getting your degree. You studied, worked, and applied for loans to get you through. You even managed to get a good job after graduating. You did everything right. Except these loans are killing you! With rent, utility bills, and other possible hardships, repaying these loans has been difficult to say the least. Is bankruptcy an option in your position? Let’s look at student loans and bankruptcy.
In general, most debtors will not be able to discharge (wipe out) student loans through Chapter 7 or Chapter 13 Bankruptcy. Federally guaranteed student loans are generally non-dischargeable in bankruptcy. However, if you are able to prove hardship in paying back these loans there may be an exception for you. While most courts are fairly reluctant to discharge student loans there is a standard (many use the Brunner Test) to see if you qualify for the hardship relief. The Brunner test looks at: whether the current payments/expenses do not allow you to maintain a minimum living standard, whether the financial situation will remain, and if you have made good faith effort to repay the loans. Other courts use other standard tests to evaluate the hardship level such as the Totality of the Circumstances Test or the test for Health Education Assistance Loans. If these standards are met a court may decide to wipe out part or the whole of the student debt. Rule of thumb, however, the debtor must be deceased to discharge a federally guaranteed student loan,
President Obama and Legislators are examining this growing issue as well. As of March 2015 President Obama issued an order to review bankruptcy procedures for educational borrowers. Following that announcement, a number of Democratic senators introduced the Fairness for Struggling Students Act, which proposes allowing certain private student loans to be discharged in bankruptcy (something that was permitted as recently as 2005).
Like most change, improvement in student loan forgiveness will probably be slow in happening. In the meantime, struggling borrowers may need to look elsewhere for relief. People with very low incomes may benefit from pursuing income-based repayment plans. Talk with a qualified bankruptcy attorney to discuss the specifics of your case. Call The Law Office of Barry Levine for help with your student loan situation.