Millions of people have student loan debt that seems unending. The cost of attending college and graduate school has become such that there really isn't any way to avoid going into debt. For some people, this can become overwhelming and ruin their lives from a financial perspective. So, let's look at whether you can discharge student loans in bankruptcy.
Can a bankruptcy filing take care of your student loans? Well, we've all been told or heard that it cannot. The student loans are given special attention by the judge and supposedly you can't get them extinguished like with other debt. This is, in fact, false. Student loans can be discharged in bankruptcy, but not as easily as debts like credit card balances.
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The student loan issue is one that involves a balancing of rights. First, the loans should be protected because otherwise no bank is going to give a 17 year old $20,000 to go to school. It just isn't going to happen, particularly after the Great Depression. On the other hand, what about a person who goes to medical school but can't make it through. They end up with no medical degree, but $100,000 in debt. That debt will follow them for the rest of their lives.
The bankruptcy code deals with this conflict by using an undue hardship standard. If you wish to discharge your loans, it is not as simple as just filing bankruptcy. Instead, you must attend a hearing and argue that allowing the loans to survive would cause you undue hardship. Importantly, the lender will have an attorney there arguing just the opposite, so it is a contested hearing.
How does the court determine undue hardship exists? Well, different courts apply different tests. The "Brenner Test" is the most common and is named after the bankrupt individual in the case that established it. The test requires three things be found. First, the debtor must have made a good faith effort to repay the debt. Second, the debtor can't maintain a baseline standard of living for themselves and anyone that is dependent upon them such as kids or a spouse. Finally, this inability to maintain the standard of living must be something that would last throughout the majority of the repayment period.
As you can see, getting your loans discharged through bankruptcy is not a piece of cake. You'll have to show hardship, but it can be done.
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