Is it Possible to Discharge Student Loan Debt in Bankruptcy?
If you feel mired down in student loan debt, you are in good company. According to the Institute for College Access & Success, in 2012 the average debt for graduating seniors from private, non-profit colleges was $32,300. Those graduating from for-profit colleges had, on average, $34,950 in student loan debt, which is up 26% from 2008. In 2012, 71% of all students graduating from four-year colleges had student loan debt.
These students are graduating with staggering levels of debt, and they are entering a challenging economic climate which makes finding a good-paying job difficult, if not impossible. Very quickly it becomes clear that paying all of their household expenses and keeping up with loan repayments could be a difficult proposition. Before long, debt begins to pile up and people get under water trying to keep up with all of it. Bankruptcy is one option for getting a handle on consumer debt that has gotten out of control, but what about mounting student loan debt? Can it be discharged in bankruptcy along with the other, unsecured debt?
The answer is yes — in certain circumstances — you can discharge student loan debt in bankruptcy. In order to discharge student loan debt in bankruptcy, you would have to prove an undue hardship that prevents you from being able to repay the loan. The Brunner test, which is a standard that some courts use to determine if the applicant’s circumstances qualify them for a discharge of their obligation to repay the loans, looks at the following factors:
- Poverty — The individual is not able to repay their loans based on their level of income and expenses and maintain a minimal standard of living for themselves and those who depend on their income.
- Persistence — The individual’s financial situation is unlikely to change for the duration of the loan repayment period.
- Good faith — The individual has made a good faith effort to repay their student loans.
This is just one of the tests that the courts use. A Chicago DebtStoppers bankruptcy attorney will tell you which tests are used by the local courts in your area.
Chapter 13 bankruptcy can help you manage student loan payments
Filing for Chapter 13 bankruptcy may help you reduce the amount you must pay on your student loans for the duration of your bankruptcy case, which can be from 36 to 60 months. You would make your payments each month to your Chapter 13 trustee. The monthly payment amount would be based on your income and monthly expenses. Interest will continue to accrue on your student loan while you are in bankruptcy.
‘Pay As You Earn’ Programs help ease the burden of student debt
The Obama administration has recently expanded the “Pay as You Earn” programs, where federal student loan payments are capped at 10% of the borrower’s income, and after 20 years of on-time payments the loan is forgiven. Older student loans may be eligible to get their monthly payments capped at 15% of their income, and the loans can be forgiven after 25 years of on-time payments.
Generally, student loans are not covered in bankruptcy, but there are several options available even if you do not qualify to get your loans discharged. Often, getting other consumer debt discharged lightens the debt load and allows the individual to allocate a bit more of their income toward repaying student loans.
To learn more about your student loan bankruptcy options and how they might affect your financial situation, contact DebtStoppers today for your free one-on-one debt consultation with an experienced bankruptcy lawyer.