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Student Loans and Bankruptcy

The value of an education is increasing more than ever.  More and more people are going back to school, which is saturating the job market with more qualified competition.  Many people would be unable to go to college at all if it weren’t for financing options like student loans.

Like any other type of loan, however, the potential for defaulting on the loan still exists.  Even though loans exist for just about every type of person, there is never a guarantee that the borrower will be able to secure a job that can pay enough to sustain a decent living and pay off student loan debt at the same time.

When the problem of student loans becomes too much for the borrower to handle, they may consider discharging their student loans by filing for bankruptcy.  This process, however, does not allow the discharge of student loan debt as easily as other debts. 

In most cases, a student loan debt will not be discharged by a bankruptcy court unless the person filing for bankruptcy can prove that payment of the student loan debt would cause undue hardship on them, their family, and their dependents.  One test that many courts use to determine the discharge eligibility of student loans is called the Brunner test that requires borrowers to show three things:

–That the borrower cannot maintain a minimal standard of living.

–That circumstances exist which will cause the borrower’s financial condition to persist for a large portion of the student loan repayment period. 

–That an honest effort has been made to pay the loans.

Courts are not required to use the Brunner test, but they may elect to.  Being able to pass whatever test the court requires will enable the courts to discharge student loans much easier. 

Whether or not the court discharges the student loan debts, the person filing for bankruptcy can still benefit from the process.  Bankruptcy law requires all collection efforts by lenders and collection agencies to stop until the bankruptcy case is settled or until the creditor is granted permission by the court to reinitiate collection efforts.

Keep in mind that a person attempting to discharge student loans must specifically request the discharge by filing a petition with the bankruptcy court.  In the event that a person filing for bankruptcy fails to accomplish the petition, they may reopen their bankruptcy case at any time to request the discharge of student loan debts. 

Lastly, remember that “undue hardship” is up for interpretation.  One judge’s idea of “undue hardship” may be different from that of another judge.  Be sure to gather as much evidence and documentation to show undue hardship as possible because there is no telling how lenient one’s bankruptcy judge might be.  Examples of acceptable documentation include tax returns, pay stubs, bills, etc.  Anything that can paint a picture of a person’s financial situation will work great.  Consult with an experienced bankruptcy attorney for more guidance on gathering proof and evidence to show financial hardship.