Hafemeyer Law

Student Loans and Bankruptcy

Student loans, unlike most other unsecured debt, are typically not dischargeable in bankruptcy.

There are some exceptions to the general rule. These exceptions include a showing to the court that payment of the loans would pose an undue hardship on (1) the petitioner; or (2) their dependents.  Even though this exception is available, it is rarely argued successfully.

What the court determines to be undue hardship varies. Some courts use the Brunner Test.  Brunner v. New York State Higher Educ. Servs. Corp., 831 F. 2d 395 (2d Cir. 1987).  The Brunner test requires the debtor to show that 1)based on the debtors current income and expenses, a “minimal” standard of living cannot be maintained if forced to repay the student loans; 2) the current financial situation is likely to persist for all if not most of the repayment time frame, which can be shown by circumstances, such as a disability; and 3) “the debtor has made good faith efforts to repay the loans.”

For a student loan to be considered for discharge, a debtor must file a separate petition called an “adversary proceeding.”  In some circumstances these proceedings have resulted in the successful discharge of the student loans.

For example, a 50 year old borrower’s loans were completely discharged when it was shown that he was earning $8.50 per hour as a telemarketer. The court ruled that this particular individual had reached their maximum earning potential and repayment of the loans was an undue hardship.

In most situations where discharge of student loans seems unlikely, another possibility is the use of a Chapter 13 bankruptcy to decrease the amount of payments required on the loans. In a Chapter 13 filing, the court, rather than the lender, determines the monthly payment amount due on the loans based on each individual’s financial situation.

This will not reduce the total amount due. However, after a 3 to 5 year repayment plan, the debtor may be able to petition the court for a full discharge, due to undue hardship. Another advantage to filing Chapter 13 is that creditors cannot initiate collection actions while the debtor is making payments under the repayment plan.

The best option that will fit your particular financial situation will vary depending on several factors. To discuss your situation please contact my office.

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