So you want to discharge student loans in bankruptcy? As a six-figure spender on higher education, I say this in the nicest way possible: join the club. Unfortunately, most student loans cannot be discharged in bankruptcy. Unfortunately, this isn’t something that sits well with many potential bankruptcy clients. Here is an example of a conversation that I have far to often:
Handsome Arizona Bankruptcy Lawyer: “I’m sorry. Bankruptcy can help you eliminate your credit card debt and medical bills; however, you generally cannot eliminate student loans.”
Potential Bankruptcy Client: “I understand and appreciate your candid advice. By eliminating my dischargeable debt, I will be in a better financial position to pay down my studet loans.”
[One hour passes…..]
Potential Bankruptcy Client: “Hey, what gives? You told me that I couldn’t discharge my student loans in bankruptcy. I Googled it and John Doe from Sheboygan wrote an article about how he did just that. Are you sure that you know bankruptcy law?”
Okay, you’ve got me. There is a common myth that it is impossible to discharge student debts in bankruptcy – a myth perpetuated by most bankruptcy lawyers. It has been my experience that this is true upwards of 99% of the time; however, there are rare occassions in which student loans can be discharged in bankruptcy.
Through many years of successful lobbying, lendors of student loans gave gained protection against massive bankruptcy discharge. Since the BAPCPA changes in 2005, both Federal and private student loans are protected in both chapter 7 and chapter 13 bankruptcy. Despite classification as unsecured debts, these loan types have additional protection that prevents discharge in bankruptcy.
When you think about it, this is not necessarily a bad thing for students. If the possibility of easy discharge existed, those lendors offering student loans would decrease dramatically. As a result, many students would not qualify for the funding required to seek an education.
Despite these restrictions, the discharge of student loans in bankruptcy is not impossible. However, the criteria that must be met to obtain such a discharge are strict. For those interested, I will describe them in a little more detail below.
What is undue hardship?
In order to discharge student loans in bankruptcy, a debtor must be able to prove undue hardship. I should note that undue hardship does not mean that you can’t find a job or your salary is low. To prove undue hardship, you have to meet three criteria based on the Brunner test:
1. You cannot maintain a minimal standard of living for yourself/dependents with your currents loans/income
2. Your current financial situation will continue throughout the repayment period
3. You have made an effort to repay your student loans
Again, let me stress that these criteria are difficult to meet and most that seek the discharge of their student loans in bankruptcy will not obtain it, regardless of the bankruptcy attorney you hire.
Chapter 13 bankruptcy and student loans
Another common question relating to student loans in bankruptcy centers on what happens to student loans in chapter 13 bankruptcy. Are they included in your plan? Can you defer your student loans in bankruptcy? In general, student loans will be placed in a deferred state for the duration of a chapter 13 plan. This means that, while interest is still accruing, no payments are required during the duration of your plan.
Ways around the Brunner Test
It’s also possible to discharge your student loans if you show that the money does not qualify as an educational loan. For example, it doesn’t count as an educational loan if you did not receive an extension of credit or you did not attend an eligible educational institution. To find out more about these possibilities, consult an experienced Arizona bankruptcy attorney.