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What Happens to Student Loans in a Bankruptcy?

While it used to be easy to discharge student loans as part of a bankruptcy

filing, many believe that the laws have changed so significantly that student

loans can never be discharged and must always be paid back by the

borrower. It has become much harder to include student loans in a

bankruptcy, but it is still possible to discharge student loans if certain criteria

are met.

The courts take into consideration three

factors: poverty, persistence, and good faith.

This is the Brunner Test, and to get student

loans forgiven, the borrower must meet all

three factors.

First, you must be poor. The court will

consider your current income and expenses.

If you prove that you will be unable to maintain a minimal standard of living

if you have to include student loan payments in your monthly expenses, you

will meet the first criteria for getting student loans forgiven.

Second, persistence is considered. Persistence is the length of time your

current income and expense are expected to remain the same. If your

financial situation is not expected to change during the lifetime of the

repayment period, you will have met the second criteria for getting student

loans removed from your overall debt. A good example would be if you are

living on disability and your disability is a permanent condition. Having a job

that has a lot of potential for growth would show the court that you have the

potential ability to pay back your student loans in the future.

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The third is good faith. You must be able to provide documentation to the

court that you have tried hard to pay back your student loans but that you

are unable to keep up with payments. If you've never made a loan payment,

it's impossible to show good faith to the courts. Generally the court likes to

see that you have made an effort to pay back student loans for a period of

at least five years before they will consider discharging this debt in a

bankruptcy.

Educational debts are discharged by filing an adversary proceeding. This is

an additional step to filing for either chapter 7 or chapter 13 bankruptcy and

many people don't file because it gets expensive to fight this proceeding in

court. Borrowers who have student loan debt they are unable to pay back

often believe that there isn't a way to get student loans discharged so they

don't bother to file.

Student loans can be discharged, either in full or at least partially. It takes

time, preparation, and money to get student loans wiped out but if all

conditions are met, borrowers who legitimately can't pay back their student

loans can find relief in bankruptcy court.