The belief that student loans are never dischargeable in
bankruptcy is one that makes us here at the Student Loan Ranger cringe every
time we see it – and we see it a lot.
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We cringe because it’s not true. You actually can get your
student loan discharged in bankruptcy in some limited cases. In fact, according
to a study published in 2011 by Jason Iuliano, at least 40 percent of borrowers
who do include their student loans in their bankruptcy filing end up with some
or all of their student debt discharged.
The problem is the old tale that has consumers thinking
there’s no chance to have these loans discharged, so they don’t try. Iuliano’s
report found that only about 0.1 percent of consumers with student loans
attempt to include them in their bankruptcy proceedings.
To be clear, if you borrow money, you have a moral and legal
obligation to pay that money back, even if that means making some financial
sacrifices. It is strongly recommended that students do more cost-benefit
analysis and long-range planning before taking on student debt of any amount.
But sometimes life throws students some pretty big
curveballs that they just can’t plan for or recover from, and it's in those
cases that bankruptcy comes into play. If you’re in that position, here are the
most important things you need to know about student loans and bankruptcy.
The Student Loan Ranger is not an attorney and strongly
advises you to consult one before taking any type of action related to this
topic.
• Check if you pass the Brunner test: Current bankruptcy law
exempts education loans and obligations from eligibility for discharge unless
doing so would cause the consumer undue hardship. The problem is
that undue hardship is not defined within bankruptcy law,
leaving the bankruptcy courts to decide what this means.
While all courts are different, many use what’s called the
Brunner test to determine if requiring a consumer to continue to be responsible
for an education debt would cause him or her undue hardship. There are
essentially three criteria a consumer has to meet under the Brunner test.
First, continuing to pay the loan must cause the borrower to
be unable to sustain a minimum standard of living. Second, the borrower's
financial situation must be unlikely to change in the future. Finally, the
borrower must have made a good-faith effort to pay his or her loans.
If you think you meet these criteria, you will need to ask
your bankruptcy attorney to file an adversary proceeding, which is essentially
a lawsuit within the bankruptcy case itself. While you can technically file one
of these yourself, due to the complex nature of these cases it is strongly
recommended you retain a qualified bankruptcy attorney, preferably one with
experience in student loans.
• Investigate other possible discharge strategies: The
bankruptcy code describes an education loan as one that, in part, was used to
attend an eligible education institution, which is further defined as one that
is eligible to participate in the federal student aid programs.
Some consumers have been successful in arguing that, because
their private student loans were used to attend a school not eligible for these
federal student aid programs, the loans don’t fall under the definition of an
education loan and should therefore be eligible for discharge.
Another part of a student loan’s definition in the
bankruptcy code requires that the loan be used for cost of attendance expenses
as defined in the Higher Education Act. Cost of attendance expenses, for
federal student loan purposes, are essentially tuition, fees and indirect costs
related to your enrollment in postsecondary education. For example, a computer
can be considered part of the cost of attendance, but only if it is required by
the school.
With this in mind, some borrowers have argued that the
portion of their student loan funds used for non-eligible educational expenses
is dischargeable. This argument is risky, however, as most promissory notes
signed by student loan borrowers contain a statement of educational purpose,
which means by borrowing the loan, you agree to only use the funds for these
very same cost of attendance related expenses.
• Weigh whether you should bother filing for bankruptcy:
With all the new income-related repayment and forgiveness options that have
been introduced over the last few years, most borrowers, especially those with
federal loans, should be able to find a repayment strategy that is manageable,
which makes meeting the criteria for the Brunner test a little more difficult.
But remember that bankruptcy is there for a reason, so if
your debt is overwhelming and your life circumstances don’t seem like they are
going to allow you to fulfill these obligations in a reasonable way, then you
may want to consider filing for this relief. Even if you don’t meet the
criteria for student loan discharge, it might be possible to discharge other
debts, freeing up resources to allow you to pay the Educational loan.
In the end, you really only need to remember two things:
work with a qualified attorney, and when it comes to student loans and
bankruptcy, never says never.
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