Can I Include My Student Loans in Bankruptcy?

Discharging student loans in bankruptcy is a separate proceeding from filing a petition for Chapter 7 or Chapter 13. In order to ask the court to discharge your student loans, you must file an adversary complaint to prove that the student loan debt should also be discharged in your bankruptcy because repaying the student loan debt would cause undue hardship.

The undue hardship must meet the requirements of the 3-prong Brunner test, which is law established by a 1987 court case which laid out that the debtor must prove the following in order to discharge their student loan debt in bankruptcy:

  1. You’ll have less than a minimal standard of living if forced to repay your loans;
  2. Your financial situation is likely to persist; and
  3. You made a good-faith effort to repay your loans.

On the face of this test, it seems simple enough right? Unfortunately, each of these 3 prongs has attached an array of considerations that courts have used which make it extremely difficult to include student loans into your list of dischargeable debts.

Let’s look at some facts that the court has looked at in order to determine the first prong of the Brunner test. Some examples are: 1) Having an income below the federal poverty guidelines for several years before filing bankruptcy; 2) Qualifying for public assistance; 3) Owning no assets; 4) Suffering from a disability (mental or physical) that prevents you from earning more than a nominal living; 5) Lacking the ability to make payments under an income-driven repayment plan; and 6) Not being able to pay minimal living expenses and the requirement monthly payments at the same time. As you see, these standards are much more stringent than qualifying for bankruptcy. You must show the court that paying your student loans essentially forces you into living in abject poverty.

The second prong of the Brunner test looks at whether this situation is likely to persist which again, is very difficult to determine. Some factors that affect this would be education, age or health. For example, while you may be eligible for bankruptcy because of a past issue or financial downturn, in order to discharge student loans in bankruptcy, you must be able to show that your situation has no chance of changing. This is very difficult to do as the court has the discretion to predict that your health could improve or your situation may change due to an increase in earning potential with time and experience which would allow you to make some reasonable payment toward your student loans in the future.  

The third prong and probably the easiest of the Brunner test to prove is to show the court that you made a good faith attempt to repay your student loans. Some examples would be restructuring your living expenses, applying for other forms of financial hardship available to you through your loan servicer and using every available resource to pay your student loans to no avail.

While discharging student loans in bankruptcy is not an option for most clients, it is still wise to contact our office at 651-628-9929 to discuss your specific situation with an experienced attorney whereby filing bankruptcy on your other unsecured debts may free up some income to make your student loan payments more manageable.  

By Ann Hagerty

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