It is often said that student loans cannot be wiped clean if you file bankruptcy. That is true to a certain extent; however, there are exceptions. In some cases, you may be able to wipe your student loans out by filing bankruptcy. This is not an easy task, and the criteria to meet this exception is high.
Whether a student loan is discharged based on hardship is not determined without filing an adversary proceeding. This can mean your creditors will need to appear in court to challenge your filing. It is strongly recommended that you do not do this without the assistance of a qualified bankruptcy attorney.
A student loan can be discharged in bankruptcy only if the payment of the debt imposes significant financial hardship on the debtor and their dependents. Courts are known to use different tests to assess whether the person filing has shown or can prove substantial financial hardship.
The most common test used is found in Brunner v. New York State Higher Educ. Servs. Corp., 831 F. 2d 395 (2d Cir. 1987). The Brunner test is as follows:
- The debtor cannot maintain a minimal standard of living for themselves and their dependents;
- Other circumstances indicate the inability to maintain a minimum standard of living are of a prolonged nature and would prevail for an extended portion of the repayment period; and
- The debtor made a good faith effort to repay the loans.
It is important to note that the law in this area is changing, and courts are beginning to question whether a different standard needs to be used. If undue hardship can be proven, the student loan is completely canceled.
At Melaragno, Placidi & Parini, we cannot emphasize enough that before you move forward to declare bankruptcy and carry a student loan, talk to us first about your options. There are pros and cons involved in filing bankruptcy, and you need to know them to make an informed decision.
A student loan may be discharged in several ways, according to what the court dictates. For instance, the terms of your bankruptcy may outline that:
- Your student loan is completely wiped out
- Your student loan may be partially discharged, and you repay some portion
- Your student loan must be repaid, but under a different set of terms, that may include a lower rate of interest
Filing for bankruptcy is a difficult decision, and Melaragno, Placidi & Parini can help you navigate the process. Our highly qualified bankruptcy attorneys have the experience to serve you well. You get the results.