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Student Loans and Bankruptcy

//Student Loans and Bankruptcy

If your financial situation is looking pretty bleak, you might be wondering, “Can I just get rid of my student loan debt by filing for bankruptcy?”

Unfortunately, if you’ve ran out of other options and have decided filing for bankruptcy is the best option for you, you more than likely will not be able to wipe out your student loans in the process.

What is Bankruptcy?

If you encounter a rough financial patch in your life, whether it be from a serious illness, loss of a job, or some other issue, debt can pile up fast.

Although the Bankruptcy Code is confusing and complex, the general idea is that bankruptcy provides a solution to individuals facing serious financial hardship for whatever reason by eliminating their debts and giving them a “fresh start.”

Generally, bankruptcy for an individual filer falls into one of two types: Chapter 7 or Chapter 13.

Chapter 7 bankruptcy essentially wipes out all of your qualifying debt.

You must agree to let the bankruptcy trustee liquidate (sell) some of your property to pay back the debt.

However, you will be able to keep some of your property that is protected as exempt from liquidation under your state’s bankruptcy laws.

Chapter 13 bankruptcy is typically for high-income earning individuals who need to file for bankruptcy as a solution to their financial problems.

While you are able to keep all of your property, you have to pay back your creditors (i.e., to whom you owe money) for the value of your non-exempt assets over a three-to-five year payment plan, as well as any additional discretionary income.

Can I Get Rid of My Student Loans in Bankruptcy?

Typically, you cannot wipe out your student loan debt through filing for bankruptcy.

There is, however, and exception to this general rule.

If you can prove to the bankruptcy court that repaying your student loans would cause an “undue hardship” to you, you may be able to discharge (get rid of) your student loans in bankruptcy.

Different courts use a different variation of the test they use to determine if you would face undue hardship if you’re forced to repay your entire loan.

Some courts will look at it as an all or nothing test, where you either get the entire loan discharged, or none of it discharged.

Other courts, however, have discharged only a portion of a debtor’s student loan debt to provide them some relief.

Regardless of the test used to determine undue hardship, one thing is certain: most courts are very reluctant to discharge a student loan.

The Brunner Test

Some courts use the Brunner test to determine undue hardship.

Your student loan can be discharged if you meet the following factors:

• Poverty: you cannot maintain a minimal standard of living for yourself and your dependents if you are forced to repay your student loan

• Persistence: your current financial system will continue for a significant part of your repayment period

• Good faith: you have made a good faith effort to repay your loan

The Totality of the Circumstances Test

Other courts that have considered whether to discharge student loan debt in bankruptcy have looked at all the relevant factors in your case (such as income, debt level, etc.) to determine if repaying your student loan would cause you undue hardship.

Again, most courts will not be willing to get rid of your student loans in bankruptcy, so it is best not to rely on this in any way when considering whether if you should file for bankruptcy.

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