Bankruptcy. Student Loans. Both are scary words, right? They can be, especially if you find yourself in a position where you have to consider bankruptcy because you can’t afford to pay your bills, including your student loans.
Typically, you do not necessarily associate student loans with bankruptcy and most people understand that student loans are simply something you will need to pay off or look into student loan refinance whether it takes 10 years or 25 years.
Although this is the thought, did you know that you CAN in fact have your student loans discharged in a bankruptcy hearing? That is right. And, it is happening more often than you may have thought.
In fact, a woman was able to get her loans discharged due to suffering from a variety of medical and mental conditions. Since it limited her ability to finish school and even to work, she was able to have her student loans completely dismissed in bankruptcy court.
One thing to keep in mind though, is if you do file for Chapter 7 or Chapter 13 bankruptcy, you may not have all of your student loans dismissed, but you may have a portion of them dismissed or other arrangements made for you to pay them. Don’t automatically assume that you will have your loans discharged, as many people have attempted and failed.
How Bankruptcy Court Determines Whether to Dismiss Student Loans
Before your student loans are simply dismissed, the court uses a system call the Brunner test to determine whether or not you should have the loans canceled out.
The Brunner test requires you to prove that you are unable to maintain a minimum standard of living (staying out of poverty) because of your student loan debt and payments. This means that you would not be able to afford housing, food, or utilities, if you were forced to pay the student loans back.
The next thing that must be proven is that the situation you are in or inability to pay will continue to persist throughout most of the loan repayment time period. This means that you cannot only be facing a hardship for one year. Your situation would need to be one that is considered long-term such as you never finished school, you only make minimum wage, and you are stuck in the same cycle of not being able to afford your payments or get a better position in a company.
Lastly, you will also need to prove that you have actually taken steps to try and pay off the student loan itself. This means that your loan cannot just be sitting in default without any attempted resolutions or payments. You need to actually try to afford the payments first before you can claim that you cannot afford them.
What Happens Next?
If you pass the Brunner test and you are in fact able to prove all of these things, the court will usually rule in your favor and cancel out your current student loans. Once the bankruptcy is approved, you will no longer have to worry about wage garnishments, harassing debt collector calls, or repetitive collection statements.
If your student loans are canceled, you will no longer have to worry about paying back the debt UNLESS you choose to take out a new loan and go back to college. It is important to note that bankruptcy only gets rid of your current student loan debt and not future student loan debt. In addition, you should never use bankruptcy as a way to get out of paying for your student loans. Now, don’t get us wrong here, if you are stuck in a poverty cycle or you cannot afford the loans, then bankruptcy is likely the right option for you. It is just important to note that you should not use it as a means to rid yourself of the debt.
Proving a hardship in court is not easy, but it does happen. Bankruptcy is an available option that should be used wisely and it is recommended that you speak with an attorney or financial advisor BEFORE you decide to follow through with bankruptcy. Also, considering a reorganization of your debt through Chapter 13 bankruptcy may be a better choice for you in the long run.