Most people believe that student loan debts absolutely are not dischargeable in bankruptcy. While most of the time this statement is true, it it not true all of the time.
In fact, student loan debts can be discharged in the event of extreme circumstances also known as undue hardship. It all depends upon an individual's life circumstances as well as the type of bankruptcy being filed.
Chapter 13 Bankruptcy
Chapter 13 is a reorganization of debt, meaning debts are not discharged immediately. Instead, the debtor enter a repayment plan to pay back a set portion of their debts. One they file Chapter 13, an automatic stay (injunction) goes into effect that prohibits creditors from trying to collect on the debt.
Student loans are considered "non-priority unsecured debt” which means that the debtor is not required to pay the full amount of their student loans through a repayment plan. Rather the debt will be restructured under the payment, including your student loan debt obligations.
How To Discharge Student Loan Debts Under Chapter 7 Bankruptcy
Student loan debts may be discharged in a Chapter 7 case only upon a successful sowing of undue hardship. Hardship is not an automatic result in the Chapter 7 proceeding. You must file a separate petition or complaint to determine dischargeability with the court to obtain the hardship determination.
If the debtor has already filed for bankruptcy but failed to include this determination of undue hardship, they may be able to reopen the bankruptcy case to file the proceeding for undue hardship.
In order to have student loan debts discharged in Chapter 7 bankruptcy, the debtor must show that payment of the debt will "impose an undue hardship on you and your dependents."
This standard can be tough to meet, but it can be done and has been accomplished before. The questions is: how do you go about showing undue hardship?
The Brunner Test
Different tests are used by court to determine whether a borrower has an undue hardship, but one of the more common tests is known as the Brunner test. The Brunner tests comes from the court case of Brunner v. New York State Higher Educ. Servs. Corp., 831 F.2d 395 (2d Cir. 1987).
This test requires the filer to prove that:
(a) he or she cannot maintain, based on his or her current income and expenses, a minimal standard of living should the student loan debt be enforced;
(b) additional circumstances exist that would indicate that this difficult period will last for a significant period of time throughout the repayment period; and
(c) the debtor has made a good faith effort to pay the loans.
Not all courts use this test, but the great majority of them do follow this test.
Defending the Petition
Obviously, the student loan company still wants to be paid. Chances are, they will want to fight the petition. You should expect a court hearing, which brings along the issue of attorneys' fees. However, if you are successful in winning your case, the reward far outweighs the risks.
What Happens Next?
Once you have proven undue hardship, the student loan will be cancelled. Like other debts, bankruptcy filing automatically protect you from any collections actions on your debts.
The automatic stay lasts until the bankruptcy case is resolved or until the creditors are granted permission from the court to begin collection on your debts again.
Your student loan debts would go along with the remainder of your debts - forever discharged. This relief can lift a huge burden for families who may suffer under the burden of student loan debt while struggling under other circumstances that make repayment of the student loans near impossible.
An Uncommon Occurrence
Why is it so rare to hear about student loans being discharged in bankruptcy? The reasons for this is that few bankruptcy filers try to discharge their student loan debts.
Whether it is because of the misconception that it cannot be done or the fear of lengthy litigation, most filers continue to try to pay their student loan debts while seeking to discharge their other debts. However, under the right circumstances, the odds of winning a petition to discharge your student loan debts is positive.
As long as you have the evidence to support your argument that payment of your student loan obligations while attempting to work your way through a bankruptcy proceeding would be an undue hardship, you could very well find yourself being relieved of the obligation of facing this insurmountable debt.
CONTACT AN ARLINGTON BANKRUPTCY ATTORNEY FOR A FREE CONSULTATION TODAY
An experienced Texas bankruptcy lawyer can help to determine whether your circumstances could qualify you for discharge of your student loans and can answer any concerns you have about the bankruptcy process.
Call the Law Office of Marilyn D. Garner TODAY at 817.381.9292 to schedule a free confidential consultation to discuss how bankruptcy may help to manage your debts, including student loans.