Do you have a college education? If you received it within the last several years, odds are you probably have some sort of outstanding student loan debt. When it comes to outstanding household debt, student loans rank second only to mortgages, and they recently surpassed credit cards as the type with the highest percentage of a balance that is 90 days or more delinquent. So if you're facing financial hardship and are considering bankruptcy to discharge your debts, you may be wondering if that will also include your student loans.
However, most people who approach us with this question are disappointed with the answer: most debtors are unable to discharge their student loans through either Chapter 7 or Chapter 13 bankruptcy. That is, unless you qualify for one extremely specific exemption.
There is one way you can have student loan debt discharged in bankruptcy: you must prove to the court that paying your student loans would create an “undue hardship.” What this means can vary from court to court, but the essential basis is showing that paying back your student loans would continue to cause you severe financial hardship, even after declaring bankruptcy.
One method some courts use to determine if a student loan would warrant undue hardship is known as the Brunner Test. This test states that if you meet all three of these factors, then your loan is an undue hardship and should be discharged:
- Poverty: Your current levels of income and expenses mean you cannot maintain a minimal standard of living if you are forced to continue repaying your loan, including a standard of living for any dependents.
- Persistence: Your financial situation cannot be temporary—you may only qualify for discharge of student loans if your situation is not likely to change anytime soon or for a significant part of your repayment period.
- Good faith: You need to demonstrate that you have made a good faith effort to try to pay your loan back. If not, then the court will likely refuse to discharge your loan debt.
Another commonly-used method is the “Totality of Circumstances” test. This procedure involves the court looking at all relevant factors in your case and using its own judgement to determine if paying your loan is an “undue hardship.” In other words, you may be able to keep your income level above the poverty line, but if your expenses or financial obligations from outside forces still prevent you from being able to pay your loan, you may still be able to receive a discharge.
As you can see, most people who wish to have their student loans discharged will likely not qualify, but if you think your loans would provide you with an undue burden, you should bring your case to a Richmond bankruptcy attorney and let them represent your interests when going before the court.Call Bruce W. White, P.C. today at (804) 655-0502 to obtain a free consultation and get help managing your debts, including student loan debt!