Student loan debt is a real challenge for many people, particularly recent graduates out there trying to find work that, in some cases, just isn't there. When keeping up with student loans becomes not only challenging, but impossible, some may wonder whether bankruptcy can provide them with a way out of the mire. The answer is that it can, but only under certain circumstances.
While debtors used to be able to discharge student loans in bankruptcy like most other debts, that changed in 1976. Under federal law, student loans can only be discharged in bankruptcy when continuing to pay them would place an "undue hardship" on the debtor. This high standard is measured by what is known as the Brunner test, which comes from a 1987 federal court decision.
Under the Brunner test, there are several conditions for receiving a discharge of student loans in bankruptcy. These are:
- The debtor is unable to maintain a "minimal" standard of living based on current income and expenses
- These circumstances are likely to persist for a significant portion of the repayment period
- The debtor has made good faith efforts to repay the loans.
In practice, it is very difficult to meet the requirements for attaining a discharge of student loans in bankruptcy. Because of the difficulty of meeting the standard, many people don't even bother trying. Something like 1,000 people per year attempt to bring undue hardship claims, but there are no numbers indicating how many are successful.
Those who feel they may have a case for undue hardship should speak to their bankruptcy attorney to determine what options are on the table and the best way to proceed.
Source: Business Insider, "Actually You CAN Escape Student Loans Through Bankruptcy," Aaronn Kase, September 17, 2012.
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