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When Can Bankruptcy Be Applied To Student Loan Debt?

When Can Bankruptcy Be Applied To Student Loan Debt?

Most people will tell you that student loans cannot be discharged in a bankruptcy proceeding. While that's true in most cases, it isn't true in all cases. However, the circumstances required to make it possible are so limited and narrow that it's not worth considering as an option for your student loan solutions unless you're facing total and complete financial ruin.

First of all, the bankruptcy must be filed under Chapter 7 or Chapter 13. It is not possible to get student loans discharged under any other type of bankruptcy. The discharge is also not part of the main bankruptcy proceeding; it requires a separate adversarial proceeding. While it's quite possible to handle a standard bankruptcy on your own if you have circumstances that are simple enough, it is very difficult to win an adversarial proceeding without hiring a lawyer to represent you.

The next problem is that there are no hard and fast rules about discharging student loans at any level of the federal and state court systems. There is language that permits it if the loan recipient is in circumstances that make it extremely unlikely that they will ever be able to pay off the loan, but the ultimate decision is still at the discretion of a judge and usually relies heavily on prior case law.

So what has prior case law established about student loan discharges in bankruptcy? Certain conditions, like facing a total and permanent disability, can certainly sway the opinion of a judge. For those who are working and are simply struggling to make ends meet, however, the circumstances have to be pretty severe for the court to consider discharging their loans. The most commonly used standard in these judgments, the Brunner Test, stipulates that debtors have to show that even a minimum student loan payment will cause hardship in their life. While that's certainly a situation that some people find themselves in, there's tougher criteria that they also have to meet; an assessment of their future prospects to determine if they will ever have a realistic chance of paying off the loan or meeting the minimum terms under federal repayment assistance programs.

A bankruptcy solely for the purpose of discharging student loans is usually a bad idea because of the impact it has on future ability to secure credit. If you feel it is necessary to file for bankruptcy due to other circumstances, however, the assistance of an experienced attorney can help to get student loans included in the bankruptcy under the right circumstances. Contact us to learn more.