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Bankruptcy and Student Loans: What You Need to Know

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You may have heard that student loans are not dischargeable in bankruptcy. However, this is a construed and oversimplified statement. Under certain circumstances, you can get your student loans discharged, but the threshold is higher, and the process is more complicated than it is for other forms of debt.

To do so, you must demonstrate that paying the debt will cause you and your dependents undue hardship. Courts use different criteria to determine whether a borrower has shown undue hardship. Our District, the 5th Circuit uses the Brunner Test.

The student loan will get canceled if you can successfully prove undue hardship. Declaring bankruptcy also shields you from collection actions on your debts.

Consult with a bankruptcy lawyer to understand how bankruptcy and student loans interact.

Undue hardship

In legal terms, an undue hardship is a set of situations that entirely or partially excuses an individual or group of people from performing a legal obligation to avoid an unreasonable or disproportionate burden or hindrance.

Because the U.S. Bankruptcy Code does not define undue hardship, bankruptcy courts interpret it differently. To have your student loans dismissed in bankruptcy, you must show that paying them will cause you undue hardship. The test for finding undue hardship differs with each court.

Most courts use The Brunner Test to assess whether a bankruptcy filer’s student debts meet the undue hardship criteria. To get your student debt discharged or partially discharged, you must show that you fulfill all three components of the Brunner test:

  1. Payments on your student loans would prevent you from sustaining a minimum standard of living based on your current salary and costs. To meet this, you must have bare-bones expenses and have tried everything possible to raise your income without luck.
  2. For most of the student loan repayment period, your financial situation is likely to remain unchanged. For example, you may be able to meet this requirement if you have a substantial mental or physical disability, received a limited education, or have reached your income potential in your profession.
  3. You’ve made sincere attempts to repay your debts. This point can be met by making some debt payments, seeking to arrange a payment plan, and striving to reduce needless spending and boost income.

Is there such a thing as a student loan bankruptcy?

“Student loan bankruptcy” is not a distinct form of bankruptcy. To successfully have student loans dismissed through bankruptcy, you must first file a Chapter 7 or Chapter 13 Bankruptcy and then file an “adversary proceeding,” or AP. You must submit the AP to prove undue hardship and request that the Court discharge your Student Loans.

Are student loans your only debt?

Your student debt is most likely only one aspect of your present financial difficulties. If student debt is your sole economic issue and presuming that your Student Loan Creditors are not garnishing your wages or otherwise taking prohibitive collection actions against you, it is unlikely that a bankruptcy in our district will be helpful in resolving your Student Loan issues. If your Student Loan creditor(s) are garnishing your wages, levying your bank accounts, or taking otherwise aggressive collections efforts, bankruptcy can be used as a tool to reset the clock and help remove those barriers and resume making reasonable monthly payments on your student loans.

Consult with a bankruptcy lawyer to understand how bankruptcy and student loans interact.

Important things you need to know:

Are you filing for Chapter 7 or 13? There are some key factors you must know.

  • It’s possible to end up owing more: When it comes to getting student loans in order, Chapter 13 bankruptcy might have downsides when dealing with Student Loans. The bankruptcy code prohibits repayment of one unsecured creditor when another unsecured creditor is not receiving the same pro-rata share of the repayment. Student Loans are an unsecured creditor. This means that if you are NOT repaying a dividend to your unsecured creditors, you likely will not be able to pay on your student loans while your case is active. In that case, you may wind up paying more interest on your student loans due the accrual of the interest during the Chapter 13 Case.

The type of loan can determine the outcome: A private student debt may have a higher chance of being discharged than a federal student loan. Consult with a bankruptcy lawyer to understand how bankruptcy and student loans interact.

With Acker Warren P.C., you can get exceptional legal services that go beyond the courtroom. Through the financial system and chapter 13, chapter 11, and chapter 7 bankruptcy proceedings, we’ve helped thousands of customers get debt relief.

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