The Basics: Can Bankruptcy Cover My Student Loans?

There are chapters in the federal bankruptcy code to deal with a variety of situations and financial circumstances. For consumers, the chapter they file under to seek protection depends largely on the type of debt they’re carrying, and in what amount. One question our lawyers get all the time about debt pertains to student loans. “Can bankruptcy erase my education debt?” our clients ask. Like many things involving the law, it depends on your own individual case. Let’s get into the details.

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Student Loans are Non-Dischargable Debts in Bankruptcy

Once upon a time, consumers could discharge student loan debt much like bankruptcy applicants expunge credit cards or medical bills. That didn’t sit well lenders or the federal government — entities that guarantee millions of dollars in education loans each year. The result was a change in the federal statute providing that student loans are not discharged by the bankruptcy — the loans are still owed after the bankruptcy is complete.There are, however, exceptions to the rule.

The Undue Financial Hardship Rule in Bankruptcy

If you can show the court that repayment of your student loans will place “undue financial hardship” on you, the court may expunge the debt through bankruptcy. Meeting this requirement is extremely challenging even for experienced bankruptcy lawyers. To win approval, you not only must show the financial difficulty of repayment, but also that your earning potential to repay those loans is not likely to change over your lifetime.

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Using the Brunner Test to Determine Hardship

Some courts utilize the Brunner Test to determine your financial circumstances in making a final decision to discharge your student loans. You must meet every condition of the three-part test:

  • Repayment will put you and your family at or below the poverty level and greatly inhibit your ability to maintain a basic standard of living.
  • Your financial situation is likely to last for an extended period of time.
  • You have made good faith attempts to repay the student loan debt in question.

The totality of your circumstances may also impact the court’s decision to expunge your student loan debt. For example, if you were involved in a severe motor vehicle accident that’s left you permanently injured, the impact of the physical damage may permanently inhibit your income potential. Because your condition isn’t likely to improve, the court could rule to include the loans in your bankruptcy filing.

Should I Hire an Attorney to Help with my Case?

Applying for bankruptcy may still be able to help restructure your other financial obligations or expunge unsecured debts to free up more of your income to devote to student loans. A bankruptcy lawyer in your area can help you review your income and total debt to make a determination as to the most effective path to take in seeking protection.

Contact our law offices today to gather more information about the bankruptcy process, and what our attorneys can do to help you with your claim right now.