Can Student Loans be Discharged Through Bankruptcy?

New Jersey Bankruptcy Attorney Discusses the Facts

A commonly-held belief in the last few years is that one cannot, under any circumstances, discharge a student loan debt through bankruptcy. The accepted thought is that you can get rid of most kinds of unsecured debt through bankruptcy, but student loans cannot be reduced.

Student loans can, in fact, be reduced or discharged by bankruptcy, but only for those able to prove that repaying a loan would cause undue hardship. This is a difficult condition to meet: undue hardship is undefined in the bankruptcy code. To begin with, though, you must be able to prove that not only are you unable to afford your loans repayments now, but that you have very little chance of being able to pay them in the future.

Since common wisdom says that discharging student loans is impossible, most borrowers do not even try. A 2007 report found that there were as many as 69,000 people who would have been excellent candidates for such a discharge, but that less than 300 actually tried to include student loan debt in their bankruptcy filings.

Can Student Loans Be Partially Discharged in Bankruptcy?

A law school graduate recently won a 10-year court battle to discharge his student loans, when the 9th U.S. Circuit Court of Appeals upheld the partial discharge of his loan debt.

The man was loaned approximately $85,000 for law school. After failing his bar exam on three separate attempts, the only job he could get was as a juvenile counselor. He was then married and had young children, and filed bankruptcy at the age of 33.

The court rejected arguments that the man should find another part-time job, citing substantial evidence he had maximized his income. The court also held that he was justified in rejecting repayment options requiring thirty years’ worth of monthly payments he could not afford. The appeals court affirmed the finding of undue hardship and the partial discharge of $53,000 from his student loan debt.

How Will the Court Determine If I Am Facing Undue Hardship?

The Brunner test is named after a bankruptcy court case regarding undue hardship. This test employed by many courts and helps determine if continuing to try and pay off an education debt would cause undue hardship. There are just three essential criteria to the Brunner test:

  1. Would continuing to pay the loan cause the borrower to be unable to maintain a minimum standard of living?
  2. Is the borrower’s financial situation unlikely to change in the future?
  3. Has the borrower made a good-faith effort to pay his or her loans?

Those who meet these criteria may file an adversary proceeding, which is like a lawsuit within the bankruptcy case. It is perfectly legal to file this yourself, but the process is even more complicated than the bankruptcy filing itself. It is highly recommended, therefore, that an experienced bankruptcy attorney handle this filing on your behalf.

I Can’t Pay My Student Loans and I Need a Morris County Bankruptcy Attorney

Sometimes life throws a wrench into our best laid plans. The New Jersey bankruptcy attorneys at Ast & Schmidt, PC understand that. A financial crisis can happen at any time, and when it does, life can be frightening. Our attorneys want you to understand that even if you don’t qualify for a student loan discharge, filing for bankruptcy can open up your resources and allow you to pay your student loans in a reasonable manner. We want to make the transition during this time as simple and painless as possible. Contact us right away.

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