Under the existing Bankruptcy Code, an individual cannot discharge student loans in bankruptcy unless doing so would result in undue hardship. The bankruptcy courts use an approach known as the Brunner test to evaluate if such a hardship exists.
In bankruptcy, it is difficult, but not impossible, to discharge student loans. To do so, you must demonstrate that repaying the loan will “impose an excessive burden on you and your dependents.”
Different standards are used by courts to determine whether a particular borrower has demonstrated excessive hardship.
The Brunner test is the most commonly used.
According to the so-called “Brunner Rule,” student loan obligations are only dischargeable under extreme and highly specified conditions. Although showing excessive hardship under the Brunner rule might be difficult, student loan partial discharges are more usual. Borrowers of federal or private student loans may be denied discharge in some situations, but may be allowed a lower interest rate, deferment, or an extension on the payback duration of student loans.
A bankruptcy court uses the Brunner test to decide whether repayment of your student loans will create undue hardship, thereby justifying the discharge of some or all of your student loan debt through bankruptcy.
- If you are forced to repay your loans, you will be unable to sustain a minimal level of life for yourself and your dependents based on your existing income and expenses.
- Your existing financial status is expected to persist for the majority of the repayment period.
- You have made an honest attempt to repay your school loans.
- Circumstances that make repayment difficult will persist for a large percentage of the payback term.
Whether your incapacity to make student loan payments is due to an emotional or physical impairment, or other conditions, the court will only consider dismissing student loan debt if the condition is believed to be permanent, or at least to outlast the life of the loan.
Even if you are not awarded a full discharge of your loan, the bankruptcy judge may grant you a partial discharge. In such a case, a portion of your obligation would be canceled, while the remainder would remain your responsibility. The court will analyze your income and cost information to determine how much you can afford to pay before deciding on a discharge amount.
Do student loans disappear if you declare bankruptcy?
If you can successfully demonstrate excessive hardship, your student loan will be cancelled entirely. Filing for bankruptcy automatically protects you from collection proceedings on all of your obligations, at least until the bankruptcy case is finished or the creditor obtains permission from the court to resume collection efforts.
It is tough to discharge student loans in bankruptcy, but it is doable. Furthermore, while you must be able to demonstrate undue hardship in a Chapter 7 bankruptcy to discharge federal and private student loans, a Chapter 13 bankruptcy may afford other benefits. Because Chapter 13 reorganizes debt rather than discharges it, the debtor is frequently able to incorporate student loan payments in the three-to-five-year repayment schedule. This will most likely lower your monthly payments and keep creditors at away during the repayment time. When the payback time expires, you will be liable for the remaining balance, including any interest that may have accrued.
Whether using the Brunner test or other grounds, most courts are highly hesitant to discharge student loans through bankruptcy. However, if you are 50 or older, are likely to stay poor for the rest of your life, and have worked diligently to repay your loans, you may be a better candidate for student loan discharge.
Despite the fact that the Brunner test is notoriously tough to pass, some courts have begun to relax their standards. As a result, passing the test has become a little easier in recent years. Despite the fact that more than three million people have more than $100,000 in student loan debt, most bankruptcy cases involving student loan debt do not advance to adversary procedures. You are not alone if you are feeling overwhelmed. You also have the right to contact your Congressperson and demand that the present law be changed.