Should I Declare Bankruptcy if I Can't Pay My Student Loans?

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Knowing what your options are when filing for student loan discharge is important. Discover your options when your student loans are becoming too much to handle.

Declaring Bankruptcy If You Can’t Pay Your Student Loans

Generally speaking, student loans cannot be discharged in bankruptcy, but there is one exception to that. Under chapter 7 and chapter 13 bankruptcy, you can have your student loans dismissed if you can prove that paying them would cause undue hardship to you and any dependents.

Undue Hardship Exception

Many courts look at and test undue hardship differently than others. Some courts say that if you don’t completely qualify for undue hardship, then you will not get any relief from that debt. Other courts will look at your circumstances and provide some relief from paying your student loans. In essence, they will discharge some but not all of the money you owe. Regardless, the courts are very reluctant to discharge a student loan, but if your income is very low and the loans are from a for-profit school, your chances of debt relief are much better. Some of the tests that the courts utilize to decide whether or not to discharge student loans are as follows.

Brunner Test

In order to pass the Brunner Test and have your student loans discharged, you must meet the following three criteria.

  • Poverty – Based on your current income and expenses, if your income is below the poverty line and you are unable to provide for yourself and your dependents, then your loans could be discharged.
  • Persistence – Your financial situation is expected to last for a significant portion of the student loan repayment period.
  • Good Faith – You have made significant good faith effort to repay the loan but have been unsuccessful.

Although the courts tend to strictly interpret the Brunner Test rules, whether or not your loans will be discharged depends in large part upon the jurisdiction you live in. Many jurisdictions have different rules and guidelines they follow.

Totality of Circumstances Test

This test takes into consideration the debtor’s living expenses, resources, relevant circumstances such as marital status, and health, and other circumstances which would prevent them from paying their student loans. The court will look at all relevant factors to decide if repaying the loans would cause undue hardship on debtors and their dependents. But, it is the responsibility of the debtor to prove undue hardship and that the payment of student loans would not allow them to maintain a minimal standard of living.

Tests Used by Other Jurisdictions

There are many different tests that jurisdictions use in deciding whether student loans can be discharged under bankruptcy. For that reason, it is best that you check with an attorney in your area to see what those test criteria entail.

Student Loan Discharge Procedure

If you plan on trying to have your student loans discharged under bankruptcy, you will need to file an adversary proceeding, which is a lawsuit filed separate from but related to the bankruptcy case, to find out if your loans can be discharged in bankruptcy. An adversary proceeding requires that a separate lawsuit is filed under that bankruptcy for the student loans. This can be a very complex issue, one that you may consider addressing with an experienced bankruptcy attorney.

Borrower Defense to Payment of Student Loans

There are times when being unable to pay a debt isn’t the problem; rather the debtor has another reason for not paying the student loan. Students across the country, especially those who attended vocational or trade schools, have been refusing to pay their student loans because of fraud, unfair and deceptive business practices, and breach of contract by the schools they attended. If successful, debtors who sufficiently prove their case will have their student loan debts removed. Although this type of student loan debt really has little to do with the inability to pay and bankruptcy, it is being mentioned in order to help students who fit the borrower defense category.

If Student Loans Were Not Discharged

  • Chapter 7 – If the bankruptcy court found that your student loan debt could not be discharged, you still owe your creditors the money. If you have a lawyer who helped you with the student loan bankruptcy filing, they may be able to provide additional advice if you are unable to pay. One piece of advice would be to defer the loans until such time that you may be able to pay them. Or, if you have a disability, it may be possible to have the loans dismissed entirely.
  • Chapter 13 – The advice here is pretty much the same as it is with chapter 7 bankruptcy, except that you may be able to have your monthly student loan payments temporarily reduced under the chapter 13 bankruptcy plan. But, keep in mind that you will still be responsible for the balance of student loan payments after the bankruptcy period ends.

Consulting an Attorney

Knowing what your options are when filing for student loan discharge is important. Attorneys who specialize in student loan discharge under bankruptcy are a valuable resource. At Robert H. Solomon, PC Attorneys At Law, we take great pride in helping our clients with their bankruptcy needs. Please give us a call at (516) 407-8199 for a free consultation.

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