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Can Student Loans Be Discharged?

When a debtor is considering filing for bankruptcy, many look forward to some financial relief coming in the form of his or her debts being discharged. However, not all debts can be discharged.

In fact, student loans are often one of those debts that are commonly said to never been dischargeable. Can student loans be discharged in Chapter 7 or Chapter 13 bankruptcy?

Standard Rule of Thumb

Normally, student loan debt is not discharged in a consumer bankruptcy proceeding. However, like so many things in the legal arena, exceptions can be made. It is important that the debtor work with the bankruptcy trustee and the debtor’s attorney to help him or her through the entire process.

Can Student Loans Ever Be Discharged?

College is getting more and more expenses these days, and students are graduating with over six figures in student loan debt. That amount of debt can be crushing to the debtor, making it impossible for him or her to breathe.

Student loans can come in two different types of categories: federal or private. These categories involve two different sets of creditors going after the debtor for repayment.

The Brunner Undue Hardship Test

First, the debtor will need to file a separate law suit known as an “adversary proceeding.” The point of this proceeding is to show that undue hardship is preventing him or her from paying back student loans.

The court will hear evidence to determine if the debtor will be able to discharge all or part of his or her student loan debt. The judge will have to determine paying the debts will be an “undue hardship” on the debtor.

The test that usually accompanies this determination is called the Brunner Test:

  • Impoverishment: The debtor will need to show that he or she cannot maintain a minimum standard of living if he or she is required to keep making student loan payments;
  • Situation persistence: Further, the debtor will need to show that his or her financial situation will not change and is likely to continue through the student loan repayment period; and
  • Good faith effort: The debtor will need to also show that he or she has made a good faith effort to repay back the balance of his or her student loans.

All three of these business requirements must be met before the bankruptcy court will determine that the debtor deserves to have some or all of his or her student loan debt discharged.

The Totality Of The Circumstances Test

The Brunner Test is not the only method used to determine if student loan debt should be discharged. Courts will sometimes look at the “totality of the circumstances” test.

In this test, the bankruptcy court looks at all of the relevant factors that affect the debtor’s ability to repay his or her student loans. This test tends to be a little less restrictive and more subjective than the Brunner Test.

Student Loan Debt And Chapter 13 Bankruptcy

Under Chapter 13 bankruptcy, the debtor works with the bankruptcy trustee to prepare a repayment plan and essentially reorganize the debts involved. Student loans will be included in the debts in this repayment plan.

At the end of the proceedings, the debtor will not be required to pay the entire amount of the student loans if the court permits the debt to be included in those debts that are discharged.

If the court does not allow the student loan debts to be discharged, then he or she is required to continue paying them after the three to five-year period is over.

Student Loan Debt And Chapter 7 Bankruptcy

Chapter 7 bankruptcy is also referred to as “liquidation bankruptcy.” This means that upon the filing of the Chapter 7 bankruptcy petition, the debtor’s current claims against him or her are immediately halted under the automatic stay.

The debtor gives a list of all creditor information, each creditor is given a chance to make a claim on the debt and why it should not be liquidated.

Then upon the close of the case, the debts that are not associated with another asset or do not qualify for liquidation are thus liquidated. If student loans are included in these debts that are allowed to be liquidated, the debtor will not be responsible for them further.

Contact Us Today

At RLC Lawyers & Consultants, we are here to walk you through this stressful process of bankruptcy. To request to schedule a free consultation, please call us today at (561) 571-9610.