Student loans are backbreaking in the United States today. Hiring is slow, even worse for new graduates, and tuition continues to climb at alarming rates. It's truly a no win situation for a lot of students trying to make it in a horrid economy.
Once upon a time, discharging education loans through bankruptcy was a common practice. Bankruptcy discharged was so overused that the Federal Government and most state courts made education loans immune to a personal bankruptcy. But not in all cases. In some very narrow situations you CAN discharge student loans! It's just not very likely for most students.
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Unfortunately most bankruptcy attorneys don't know the rules around discharging education loans. They were told by their mentors that you absolutely couldn't, and left it at that.
The default rule in most jurisdictions is that you cannot discharge these types of loans, true.
However, in some cases a debtor may actually be eligible to discharge or reduce debt from education loans.
First you have to reside in a state that follows the Brunner ruling. The Brunner Test was named after a famous case that set out the Federal requirements for discharging education loans. However, individual states are not required to follow the Brunner ruling, so check in your state.
Even if you are in a state that follows the Brunner test, discharging them is no walk in the park. Under the Brunner test, a bankruptcy court looks at the following three factors to determine if repayment of your loans would cause an undue hardship, thereby justifying discharge of some or all of your student loan debt through bankruptcy.
•Based upon your current income and expenses, you cannot maintain a minimal standard of living for yourself and your dependents if you are forced to repay your loans.
•Your current financial situation is likely to continue for a big part of the repayment period.
•You have made a good faith effort to repay your loans.
Student loans are almost impossible to discharge in Chapter 7 bankruptcy. The debtor must show actual hardship to discharge student loans. Courts are very reluctant to discharge education loans and interpret the requirement very strictly. If you are able to work, or have a source of obtaining steady income, you probably don't have sufficient hardship to discharge a student loan in Chapter 7. Generally, if you are age 50 or older, are likely to remain poor for the rest of your life, and you have tried hard to pay off your loans, you may be a better candidate for student loan discharge.
In Chapter 13 cases, education loans are not dischargeable if the creditor objects the discharge. Some creditors may file an objection and others may not. It tends to depend on how busy the lender is, how efficient the lender is at filing objections, and how interested they are on the amount of the loan still outstanding. Even if the debt is not fully dischargeable, does not mean all hope is lost. As a practical matter, a Chapter 13 bankruptcy could be used to discharge a large part of student loan debt. Of course, the debtor would be gambling that his case would not be one of the exceptional cases where the student loan creditor does file an objection
Most clients should not file Chapter 13 solely to discharge loan debts. However, if student loan payments are contributing to a debt situation, then it's an avenue to pursue.
And there are other means of paying off education loans. You can request a forbearance, which will provide a stay in which you won't have to make payments, buying you more time. You can consolidate your debt, and reduce the total amount.
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