With student loan debt topping over $1.6 trillion, it seems like a dream to ever be freed from student loan debt. However, It’s a possible task to discharge your student loan debt through bankruptcy. According to SSRN, only 0.1% have attempted to discharge their debts. It’s true that courts are willing, but few are asking.
Due to the stricter requirements of student loans, you’ll need to take the additional steps to file a complaint to initiate an adversary proceeding. In Bankruptcy court this is a lawsuit filed separately from the bankruptcy case. During the proceeding the Judge will determine whether you can discharge a particular debt, which in this case, would be student loans. During the proceeding, a series of tests are performed to determine dischargeability.
The Brunner Test is a great way to determine if you can discharge your student loan debt. In 1987, Marie Brunner challenged the New York State Higher Education Servicing Corp. During a brief hearing, Marie told the judge about her struggling finances and the inability to find a job since she graduated. The judge issued a decision to discharge her full student loan debt. As a result the courts now use it to define financial hardship. They ask three questions:
- Can you pay your bills right now and still keep up a minimal standard of living?
- In the future, do you think you will earn enough money to make payments on your loans?
- Have you made good faith efforts to pay your loans prior to filing for bankruptcy?
According to 11 USC 523 (a)(8), qualified student loans will not be discharged unless the debtor shows that they are under financial stress. The court normally considers if you’re able to maintain a normal standard of living to repay the loan, as they do in any other bankruptcy proceeding. Debtors often take advantage of federal programs to delay the payment process to their creditors, this being the reason creditors will often try to challenge the request. This is why the The ‘totality of circumstances’ test was created. This test determines if a debtor has abused the process of filing for Chapter 7 bankruptcy, when there is sufficient income to repay debts. They find this information through a means test. This test looks at monthly income and assets.
Prior to 1976, student loans could be discharged alongside credit card debt. However, that has since changed. As a result of that change, bankruptcy judges have developed their own test to determine the financial hardships of a client. Many people who are burdened with student loan debt now don’t know how it can be discharged through bankruptcy.