When It's Time For Bankruptcy: What To Do About Student Loan Debt

Posted on: 30 November 2020

Financial troubles can mean bankruptcy when debts loom large with no way to pay them. Not all debts can be included in a Chapter 7 filing, though. Financial obligations like taxes, child support, and student loans are among the most common debts that filers want to have included in their bankruptcy, but cannot. In some cases, you can have your student loan debt dismissed if you meet the strict standards. Read on to find out more.

Student Loan Debt: A Case By Case Basis

Not all student loan debt is equal. For example, some for-profit schools have a reputation for offering easy loans at costly interest rates. The bankruptcy courts tend to be more lenient when dealing with this type of debt and they may be more likely to forgive this type of debt. Other factors the court may consider when asking for student loan forgiveness include your debt repayment history, the school, the loan balance, and more.

What to Know About the Brunner Test

This way of deciding on student loan debt is not used by all bankruptcy courts but some variation is often used. There are three requirements in the Brunner test and all three have to be met. 

  1. Income: This element looks at your income and your bills once the bankruptcy is complete. If you are still unable to live above the poverty level in your state if you have to continue paying the loan, the debt may be forgiven. Your post-bankruptcy bills and your dependents are used in this equation.
  2. Good faith: This is a look back at your history of paying the loan debt up to now.
  3. Longevity: The balance of your loan is considered in relation to your debt load post-bankruptcy. This determination attempts to look into the future and discern the impact of future student loan payments on your budget.

To find out what method your local federal bankruptcy court uses when determining student loan discharges, ask your bankruptcy lawyer.

What Else to Know About Student Loan Forgiveness

You cannot just include student loan debt in your normal bankruptcy paperwork. Separate filings and hearings are necessary before the discharge can be considered. Don't be put off by the name of the motions filed. Almost anything out-of-the-ordinary with a bankruptcy proceeding is labeled adversary. You can help get yourself ready for this hearing by assembling financial papers that show past payment history, current and future budgets, and future income information.

To find out more about having your student loan forgiven, contact a bankruptcy lawyer.