Millions of Americans owe some amount of student debt, and the collective balance on this debt grows every day. For many seeking higher education – whether at the undergraduate or postgraduate level – student loans are often the only way they can make their dreams become a reality.
Those dreams, however, can come with the living nightmare that is having student debt. Interest rates on these loans aren’t always fair, leaving some people to realize one day that the amount they still owe is multiple times that of the original loan!
If you owe a considerable amount of student debt, you’re probably wondering if it’s even possible to seek relief from this financial obligation through bankruptcy. Some types of debt – like tax debt and child support – can’t be discharged through either Chapter 7 or Chapter 13. The good news is that some student debt can be ejected in bankruptcy, but the bad news is that it happens rather infrequently and can be very difficult to do.
‘Undue Hardship’ Can Lead to Student Debt Discharge
In the cases where it is possible to eject student debt through bankruptcy, it must be established that doing so would relieve the borrower of undue hardship. The bankruptcy court will use the “Brunner Test” to determine whether or not someone’s student debt is causing them undue hardship.
Passing the Brunner Test is contingent upon the following three criteria:
- The borrow will be unable to maintain a minimum standard of living by continuing to pay the loan.
- The borrower’s financial situation is unlikely to change in the future.
- The borrower must have made good-faith efforts to pay their loans
Without sufficiently demonstrating that all three of these factors are true, a student loan borrower is unlikely to succeed in ejecting their debt during bankruptcy.
The Minimum Standard of Living
Perhaps the most difficult hurdle someone must overcome is the first because a minimum standard of living can be rather subjective.
When evaluating whether or not the borrow is unable to maintain the minimum standard of living because of his or her debt, the court will examine the individual’s income and expenses. If important expenses (shelter, utilities, clothing, personal hygiene, food, etc.) can’t be met because of the loan payments, then the court may grant the discharge – but often not before scrutinizing if the borrower can change his or her lifestyle to generate more liquidity.
The Borrower’s Situation Is Unlikely to Change
When it comes to meeting the second criterion, the debtor’s situation must presumably be permanent. A bout of bad luck simply won’t pass muster here. Typically, the borrower must be so severely ill, disabled, unskilled, or bound by duties to care for his or her dependents that they can’t rise above their circumstances to pay back the debt.
Good-Faith Efforts to Pay the Loan
Finally, the student debt borrower must have made good-faith efforts to pay back the loan. This means that payments were made – either in full or partially – on time and there were attempts to work out an alternate payment plan with the lender.
Discharge Other Debts to Ease Student Loan Burdens
Student loan debt can be the biggest financial obligation most people have, second only to a mortgage. Because it is such a monolithic amount of debt, there can be a lot of understandable focus on reducing or eliminating it as much as possible. This, however, can entrap many into failing to notice the forest for the trees.
If it’s not possible for a bankruptcy to resolve someone’s student debt, maybe it can ease their overall financial burden in other ways. If someone has credit card debt, medical debt, or other types of consumer debt, bankruptcy can relieve them of these financial obligations and make it more possible to afford their monthly student loan payments.
While it’s not chipping away at the monolith in the way one might have hoped, earning back some financial freedom to address student loan payments can be more relieving than one might expect.
Are You Considering Your Options in Bankruptcy?
If you’re considering how you can ease your financial burdens with bankruptcy – including student debt – reach out to Nguyen Law Group for assistance. We are available seven days a week and have flexible hours, so we can accommodate your consultation or need for legal services.