Bankruptcy is designed to provide debtors with a fresh start. Typically, you’ll have the option of discharging most of your debts, setting up a feasible repayment plan or wiping out unsecured debt while continuing to make payments on your home and other secured property you plan to keep. Unfortunately, as we’ve talked about before, it is extremely difficult to discharge student loans.
Since 1976 Congress has placed an extra set of requirements on bankruptcy filers who wish to discharge student loans. In response to concerns that debtors would use bankruptcy as a way to avoid paying their student loans, these requirements were extended to private student loan debt in 2005.
To discharge student loans through bankruptcy, a debtor must prove that paying the loans back will be an “undue hardship.” Unfortunately for people struggling to repay student loans and other debt, bankruptcy courts and lenders have a high standard for what “undue hardship” means. And, there is no real legal definition of “undue hardship.” Individual judges and lenders can decide how the concept will be applied to your particular case.
Many bankruptcy courts use the Brunner test to determine if a filer has a legitimate claim of undue hardship, and therefore should be allowed to discharge student loans. The test has three parts that the debtor must satisfy:
- Based on your current income and expenses, you cannot maintain a “reasonable” standard of living for yourself and your dependents if forced to repay student loans. As with the definition of “undue hardship” what counts as a “reasonable” standard of living is up to the individual court to determine;
- The difficulty of paying student loans will persist for a significant portion of the repayment period; and
- You have made a good faith effort to repay your loans for at least five years and/or negotiate more favorable terms.
Undue hardship—and even reasonable standard of living—are difficult to prove because the concepts are not legally defined. It’s not impossible, though. A bankruptcy attorney who knows the local courts and judges can help evaluate your chances of success. And keep in mind that, even if you aren’t able to include your student loan debts in your bankruptcy, they may be more manageable after your other debts are gone.