A huge amount of the debt Americans carry is from student loans. That debt today totals a staggering $1.2 trillion! Often people find that paying back their student loan debt is an impediment to their being able to provide minimal necessities for themselves and their dependents. Bankruptcy may be an option, but only in limited circumstances.
In order to have student loans discharged in bankruptcy, the debtor must show that it would be an undue hardship to be required to pay them. Courts will apply various tests to determine if an undue hardship exists. Regardless of the test applied, most courts are hesitant to discharge student loans, but if the debtor has very low income or incurred student loans from a for-profit school, the odds are better that a discharge will be granted.
One of the tests courts apply is the Brunner test. In order to discharge student loans under the Brunner test, the debtor must meet 3 criteria:
- Poverty. Based upon current income and expenses, the debtor cannot provide a minimum standard of living for himself and his dependents.
- Persistence. The debtor's current financial circumstances will likely continue into the future for a significant portion of the student loan repayment period.
- Good Faith. The debtor has made a good faith effort to repay his student loans.
Some courts use a totality of the circumstances test to determine if student loans may be discharged. In this test the court will look at all relevant factors to determine if an undue hardship exists.
Courts vary on this issue of whether a debtor may discharge only a portion of his student loan debt. Many view this proposition as an all or nothing situation, i.e., the debtor will be able to discharge all of his student loan debt, or he will be able to discharge none of it.
There is a formal procedure that must be followed in order to discharge student loan debt called a Complaint to Determine Dischargeability. The burden of proof is on the debtor to show undue hardship.
A good bankruptcy attorney will be able to help with the ins and outs of working through which tests, etc., apply in a particular jurisdiction.
