It’s one of the basic truths of bankruptcy: It’s almost impossible to discharge student loans in bankruptcy. Everyone knows this, so almost no one ever tries to do it.
But like most “truths,” this one has many levels and might not actually be as true as it once was. The simple fact is that, under the right circumstances, you can discharge student loans in bankruptcy just like any other debt.
How Does the Judge Decide?
Depending on where you live, your bankruptcy judge will usually decide your case using one of two tests, either the Brunner Test or the Totality of Circumstances Test. The Brunner Test uses three questions to determine eligibility for discharge:
- Will you and your family be able to maintain a minimal standard of living if you have to repay the loans?
- Is your financial situation likely to change any time soon?
- Have you made a good faith effort to repay the loans?
If the judge agrees that your situation satisfies all three questions, you may be able to discharge student loans in bankruptcy.
The second test, the Totality of Circumstances Test, requires the judge to determine if the loan is causing undue hardship.
Are The Loans Causing Undue Hardship?
In this case, the most important thing to get across in court is that the loan payments are creating an undue hardship in your life. You have to show that you can’t survive and pay student loans. With federal loans, the repayment plans are so flexible that it’s possible to have no payment at all. Many judges decide, because the short-term payments can be so low, to not allow a discharge. It’s difficult to argue that a payment of $0 is creating a hardship! However, with penalties and compound interest, in the long term the loan will likely be unaffordable. This means it’s important for the court to consider what the consequences will be down the road.
Private loans, because they offer fewer options for repayment—basically just to pay or not to pay—may be easier to discharge. Once you default on a private loan, you may be in a situation where the lender will not offer the chance to make minimum payments. They will bring the entire balance of the loan due.
Bringing on an Attorney
In order to have even a chance to discharge student loans in bankruptcy, it is vital to work with the right attorney. Remember, in order to discharge student loans in bankruptcy, your attorney will have to present your case in an adversarial process. This is full-scale litigation and can be grueling and expensive, adding to the difficulties faced by someone who is already in debt.
However, it can definitely be worth the time, effort and expense—especially for private loans. If the lender is willing to work with you, it is possible to walk away with at least an affordable monthly payment even if the debt is not discharged outright.
It’s still nothing to be taken lightly, but the perception of the impossibility to discharge student loans in bankruptcy is just that—a perception. With the right set of circumstances and a willingness to work for it, it’s certainly a possibility, and a good one at that.
If you are considering bankruptcy and have student loans, click here for a free consultation with our bankruptcy attorneys.