Student loans are great because they help so many people further their education. Upon graduation, though, they must pay back their loans. If they do not get well-paying jobs, then paying off the loans can be difficult. When a financial situation becomes difficult and bankruptcy seems like the only option, many debtors wonder if they can include student loans in their bankruptcy filing. Much confusion exists because student loans can be federal or private – the former typically cannot be discharged while the latter might be dischargeable.

At Villamor Law, we help clients considering bankruptcy understand what debt can and cannot be included and how to proceed properly and timely. Contact us at (888) 538-2111 to schedule a consultation and move one step closer to financial independence.

Overview of Student Loan Debt

Nearly half a billion Americans owe student loan debt. Overall, the national student loan debt—not taking into account private loan debt—has historically increased and is now closing in on $2 trillion. 

Against this backdrop, it is understandable that people sometimes struggle to make their student loan repayments. Doing so can result in additional fees, wage garnishments, and withheld tax refunds. It can also affect your overall credit score. A poor credit score, of course, impacts detrimentally your overall financial situation and capabilities.

If you find yourself struggling to keep up with your student loan repayments, you may consider bankruptcy in New York and New Jersey as one possible way to address the issue. 

Can Student Loan Debt be Discharged in Bankruptcy?

Bankruptcy under Chapter 7 and Chapter 13 allows you to discharge some of your debts, such as medical and credit card debt, unpaid rent, and personal loans.  

Student loan debt, on the other hand, is typically nondischargeable. However, it is possible to apply for student loan discharge under certain strict circumstances. 

To include student loan debt, you must file a complaint with the court, which is then heard during an adversary proceeding, typically with the loan provider present. This adversary proceeding, basically a lawsuit within the bankruptcy, is heard and determined separately from your main bankruptcy case. 

For a court to discharge federal student loan debt, you must show that repayment places an “undue hardship” on you, your family, and your dependents. 

Factors to Determine if Student Loans Present an Undue Hardship

When determining whether your student loan debt causes you undue hardship, the court typically uses one of two tests—the Brunner test or the totality test. 

Brunner Test

Under the Brunner test, you must show the bankruptcy court that:

• Repaying your loan means that you cannot maintain a basic standard of living for yourself and your family;
• Repaying your student loan will continue to cause you hardship in the future; and
• You have made good faith efforts to repay your loan.

Because all three components of the Brunner test must be satisfied, this is a hard test to pass. That said, it is a subjective test, so where the same arguments can be made successfully before one judge, they may not be successful before another judge. Many bankruptcy courts will instead use the totality test.  

Totality of the Circumstances Test

The totality of circumstances tests is similar to the Brunner test except that it is a bit more flexible. Here, the court takes into account all the relevant factors in your case—such as your past, current, and future financial situation as well as living expenses—to decide whether your student loan repayments are causing you undue hardship. It does not consider the third prong of the Brunner test, meaning it does not take into consideration whether you have made a good faith effort to pay back your loan.

Where the test for undue hardship is met, different courts take different approaches to dealing with the debt. It may order a full discharge of the loan or only part of it, requiring you to continue to repay the rest.

Addressing student loans is typically more successful in Chapter 13 bankruptcy as opposed to Chapter 7 bankruptcy. In Chapter 13, a repayment plan is proposed for a three to five year period, thus, a portion of the student loan will be paid back. In a Chapter 7 bankruptcy, the student loan debt would be discharged completely and so this option is less favorable.

How to Prove Undue Hardship in Bankruptcy Court

If you apply to discharge your student loan debt, the onus is on you to prove to the court that your student loan repayments cause you undue hardship. 

For courts that apply the Brunner test, you need to collect documentation to support this, like

• Student loan statements – these confirm the size of your loan and any previous repayments 
• Evidence of your income and expenses – this shows the court that you are unable to maintain a minimal living standard, e.g., a spreadsheet detailing income and expenses, including rent, mortgage repayments, utilities, groceries, fuel and car costs, medical bills, other debts and repayments, and bank and credit card statements
• Any other evidence showing the circumstances preventing you from repaying the loan, like an ongoing medical issue
• Evidence of contact with the student loan provider, demonstrating your efforts to stay in contact with them and repay your loan – examples include emails or other messages with your provider, like phone logs with name, time, date, and what was discussed
• Evidence of good faith repayment efforts, which can be done by showing income, expenses, and any loan payments made

For courts employing the totality of the circumstances standard, you will not necessarily need to show evidence of good faith efforts to pay back the loan. Of course, having that evidence will only benefit your position. A bankruptcy attorney will advise you of any further documentation relevant to your personal situation. 

Dischargeable Loans Associated with Education

Not all loans associated with education are considered student loans where an adversary proceeding would be required. Students often take out other loans to help manage the costs of their education. Loans not taken out specifically as private or federal student loans for education may be discharged as unsecured debt. These include but are not limited to loans:

• Taken out that exceed the cost of attendance, including tuition, books, room and board
• For education where the school does not qualify for Title IV funding, namely unaccredited colleges, unaccredited training and trade certificate programs, and some schools in foreign countries
• To cover living expenses while studying for professional exams (like the bar exam)
• To cover or subsidize the cost of moving for medical or dental residency
• For part-time education

Because there is often so much misunderstanding around student loans and bankruptcy, it is always best to contact a bankruptcy attorney to discuss your loans and financial needs.

Alternatives to Bankruptcy

Bankruptcy is a serious decision with long-term financial consequences. If you are considering bankruptcy on the sole basis of your federal student loans, it is important to first speak with a bankruptcy attorney who can advise you on your prospects of success. There may be other options more suitable, like:

• Deferment
• Forbearance
• Loan consolidation
• Loan forgiveness

At Villamor Law, our bankruptcy attorney review your financial situation and outline your best options. 

Contact Us Today 

Bankruptcy is about fresh starts. Getting back on financial track is critical to moving forward. If you are having difficulty repaying student loans, bankruptcy might be an option. Contact Villamor Law by filling out our online form or calling us at (888) 538-2111. We will review your financial situation and advise you accordingly.