When filing bankruptcy, student loans are generally considered nondischargeable but that doesn’t mean it is impossible to eliminate. The bankruptcy law contains a provision that specifies when a student loan can get discharged. If you’re worried about paying back your student debt, this article will enlighten as to what can happen when you file for bankruptcy.
As this guide is not comprehensive it is important to note that having an experienced bankruptcy attorney by your side is still the most recommended way to wipe out your debts, including your outstanding education loan. Various law firms offer a free case evaluation that can determine if you are a good candidate for student loan discharge.
Conditions for Student Loan Discharge
Due to the misconception that there is no way for bankruptcy to erase education loans, many individuals do not try to obtain full or partial student loan discharges. But according to the Bankruptcy Abuse Prevention and Consumer Protection Act (2005) student loans can be discharged in a bankruptcy case when they meet both these criteria:
- The loan had been used to cover the costs of school attendance, tuition, books, and other academic-related fees
- Debt repayment of debt will impose an undue hardship on the borrower and his or her dependents
The problem with these criteria is that the bankruptcy code did not provide a set definition for “undue hardship,” which means it is open to the interpretation of the bankruptcy judge. This can also mean that your jurisdiction can affect the outcome of your bankruptcy filing.
Proving Undue Hardship
Lenders for student loanees are usually private institutions like banks or the federal government. But regardless of which type of loan you have, you can have it wiped out if you meet this exemption.
To do so, familiarize yourself with your court’s “undue hardship test”. Some courts look at this as all-or-nothing where you either qualify or you don’t; while others can discharge only a certain percentage of your loan amount.
Brunner Test. This particular tool evaluates you against three factors. You will no longer be obligated to pay off your debt if you meet all of the following criteria:
- Poverty. Your current income is almost equal to the average expenses for you and a dependent and that paying back a loan will only push you below the optimal standard of living.
- Persistence. Your financial condition appears to persist and is not likely to change during the period of repayment.
- Good faith. The court sees that you made an effort to stick to your original loan terms and try to keep up with the payments.
The totality of the Circumstances Test. Bankruptcy courts that are using this tool will look at the whole picture of your case to see if anything supports your argument for experiencing undue hardship due to paying back your owed college fund.
Health Education Assistance Loans Test. Also called the HEAL test, this special assessment checks if your loan had been past due seven years ago and that repayment would give you an unconscionable burden.
There are many other financial tests that a court can employ to evaluate your condition. But to make sure that you are prepared to handle your local jurisdiction’s specific test, schedule a consultation with a bankruptcy lawyer.
Discharging Student Debt
When a debtor attempts to have his student loan discharged, an adversary proceeding must be filed to check whether the bankruptcy court deems the student debt obligation as dischargeable. When debtors decide to go through this proceeding, they’ll need to present evidence such as financial statements showing their income and expenses, perhaps a list of properties, bank accounts, employment details, and other information. Besides, they will need to have an expert testify about their ability to have or not have gainful employment in the future.
Defenses Against Student Loans
In rare cases, you might not know that you have a legal defense against the payment of your student debt. For instance, when you attended a vocational school instead of college, when a breach of contract occurred, or when the loan terms are marred by fraudulent actions or deceptive business practices. When this occurs, you may not have to pay any debt at all, but you must make sure that your legal representative has handled a similar case in the past.
Consult a Student Loan Attorney
Borrowers filing a Chapter 7 or 13 bankruptcy application often find out that their courts use either the Brunner method or some other test when determining the dischargeability of a student loan. Being familiar with how your bankruptcy court rules over such cases gives you a higher possibility of getting a favorable outcome in your bankruptcy petition.
Facing a high amount of debt and struggling to pay back? Filing bankruptcy can put you one step closer to financial stability!
Consult with our Bankruptcy attorneys from Farmer & Wright today to know whether you qualify. Our Kentucky bankruptcy lawyers will carefully evaluate your circumstances before advising you to attempt student loan discharge when declaring bankruptcy.