A question may be whether you should pursue a bachelor’s degree in healthcare administration when you know that degree comes with student debt.
Student loans are a heavy financial debt for many people, as one of every eight Americans is struggling with student loans. Student loans are currently considered the second-largest debt after mortgages, meaning they are more prominent than even credit card debt. The cost of education is high, and the high interests on student loans cause a further strain. So, if you are struggling with a student loan, can you file bankruptcy to discharge it? Read on to find out;
Student Loan Debts Are Generally Nondischargeable in Bankruptcy
When you file for bankruptcy, your debts will be classified into two broad categories- secured or unsecured debts. Unsecured debts are those that can be discharged in bankruptcy. However, some unsecured debts, like student loan debts, are generally non-dischargeable. So, even if you file for bankruptcy and qualify for bankruptcy under the Chapter 7 means test, there are high chances your student loan debt will not be discharged. Therefore, you will be legally responsible for repaying the debt even after your case.
Like other rules, there are some exceptions, depending on your situation. You can qualify for a student loan discharge by meeting the requirements under the Brunner test and petitioning the court for a discharge.
How to Discharge Your Student Loan in Bankruptcy?
To discharge your student loan in bankruptcy, you need to qualify by meeting the requirements under the Brunner Test. The Brunner Test requirements are based on the finding after a Brunner vs. New York State Higher Education Services Corp bankruptcy case in 1987.
Brunner had received a discharge for her student loans. The district court reviewed the case and determined that the bankruptcy court had made a mistake discharging Marie Brunner’s student loans because she didn’t establish her eligibility for undue hardship.
The judge asked Brunner to take a three-prong test to help determine if she was eligible for a student loan debt discharge. Since then, other bankruptcy judges have used the Brunner Test to determine undue hardship, to see if the debtor is eligible for a student loan discharge.
The three tests you need to meet are;
1. Minimal Standard of Living Test
The first test aims to determine if you can maintain a minimal standard of living if you continue repaying your student loan debt. If you can enjoy a minimal standard of living after making your repayment, then your student loan debt is not dischargeable. If you cannot maintain a minimal standard of living, the court moves to the second test.
2. Retaining Your Current Financial Situation
The second element seeks to establish if your current financial situation will continue for the remaining term of your student loan contract. For example, if you have a student loan and have recently suffered a disability, will you be in a position to return to work? Are you earning a maximum income based on your age, education, skills, etc.? Suppose your current financial situation is expected to remain the same or improve during the duration of the student loan contract. In that case, you might not be eligible for a student loan discharge.
3. Good Faith
The judge will determine your good faith after passing the two tests. Have you been putting reasonable effort into repaying your student loan when you could? If you have, the court might find you eligible for a discharge.
What is Undue Hardship and Good Faith Effort?
There is no standard definition for undue hardship or good faith. So, judges in bankruptcy courts throughout the country use different methods to determine if paying your student loan will create undue hardship that could prevent you from maintaining a minimal standard of living. Similarly, judges use various methods to interpret good faith.
You can hire a local bankruptcy lawyer to shed more light on this. A local bankruptcy lawyer understands how bankruptcy judges in the district or state work and their methods to measure undue hardship and good faith. Therefore, they understand the standards the bankruptcy judge is likely to use to decide motions on discharging student loans. Besides, a local bankruptcy attorney is well experienced and can draft a motion with the highest chances of success.
Can I Discharge My Student Loans if I File Chapter 13?
While Chapter 7 bankruptcy is affordable, you need to meet some requirements to be eligible to file a Chapter 7 case. If you don’t meet these requirements, you can always file a Chapter 13 bankruptcy. However, since the Chapter 13 case works differently, you cannot discharge your student loans, but you can get some relief. Chapter 13 case will defer your payments. You will resume making payments on completing your case, which could take a while.
You can choose to make student loan payments during our case. Alternatively, you can wait until your case is complete to resume making payments. Upon completing your Chapter 13 case, the court might discharge your other unsecured debts. Thus, you will have less debts to repay, placing you in a better financial position to make student loan payments.
Please note that with Chapter 7 bankruptcy, you may lose assets that aren’t covered by bankruptcy exemptions. Thankfully, with Chapter 13 bankruptcy, you may be able to protect those assets even above the exemptions.
Different Options to Help Repay Your Student Loan Debts
Bankruptcy is not the only option in many cases. You have alternatives to bankruptcy that you can consider.
If you are not eligible for a student loan debt discharge, this is not the end of the road. There are other non-bankruptcy options to repay your student loan, such as;
- Income-based Repayment Plan
- Student Loan Consolidation
- Student Loan Forgiveness
- P.A.Y.E Repayment Plan
- Revised P.A.Y.E Repayment Plan
- Refinancing Student Loans
- Income Contingent Repayment Plans
- Graduated Repayment Plan
If you were making your repayments but suddenly experienced a short-term financial hardship, you can qualify for a student loan forbearance or deferral. These two options will give you temporary relief from student loans until you get back on your feet.
Learn More About Bankruptcy
Besides discharging your student loan debt, bankruptcy can help discharge other debts if you qualify under the Chapter 7 bankruptcy income limits. We have tons of articles on our blog to help you understand bankruptcy at length and other debt-relief options. Call us today for any questions or to learn more about your debt-relief options.
