Student Loans: How They Can Effect Your Bankruptcy Filing

As student loan debt has overtaken credit card debt in the United States, totaling over $850 billion this year, more and more well-meaning people are coming face-to-face with the reality of crippling student loan payments.

While student loan debt is considered secured debt, meaning you are obligated to continue paying it despite filing a successful bankruptcy petition, there are certain exceptions that can allow you to discharge it in bankruptcy. However, in order to be able to do so, you must demonstrate in court that the payments “will impose an undue hardship on you and your dependents.”

Student loans are not automatically considered for dismissal in a bankruptcy filing, and in order to have yours considered, you must file an adversary proceeding.

Most courts use what is known as the Brunner test to determine whether the borrower has suffered this undue hardship. The test requires you to show that:

  1. Based on your current income and expenses, you will not be able to maintain a “minimal” standard of living for yourself or your dependents if required to make the student loan payments.
  2. Your situation is likely to persist for the duration of the life of the loan due to additional circumstances.
  3. You demonstrate that you have made a “good faith effort” to repay the loans.

While this is the standard most courts use, it is up to the discretion of that particular court whether or not they see it fit to grant your petition. There are several examples of borrowers successfully discharging their student loans. Here are a few:

a) After attending a chiropractic program but never completing it, a 58-year-old IRS employee was able to prove that his income was unlikely to ever increase from $38,000 before his planned retirement at 65, and thus, the court found that he had been acting in good faith and dismissed his loans.

b) A married couple was able to prove undue hardship from their student loans due to the fact that they both held low-paying careers, one as a teacher’s aide and the other as a teacher for emotionally disturbed children. The court found that they had acted in good faith in asking for an income-based repayment plan while working in worthwhile careers and dismissed their loans.

c) By citing her Social Security benefits as proof of mental impairment, one borrower was able to show undue hardship and demonstrating that her situation was unlikely to improve.

Even if you cannot demonstrate undue hardship from your loans, a Chapter 13 reorganization bankruptcy may still provide you relief from your loans. The biggest advantage is that your Chapter 13 plan, not your lender, will determine the amount of your monthly payments. While you will still owe the remainder of your loans after completing your 3 to 5 year bankruptcy plan, you may be able to file a new petition showing undue hardship at this time.

Many good, hard-working people have student loan payments that are beyond their ability to repay and no one should be forced to endure the hardship of these crippling payments. A bankruptcy plan can not only help you to achieve relief from overwhelming student loan payments but will also help you begin to rebuild your financial future.


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