Can Bankruptcy Get Rid of Student Loan Debt?

Yes, but those with student loans in Massachusetts will be in a for a battle

Student loans are an increasing problem for consumers. Nearly 40 percent of those between 18 and 29 years old have student loan debt, and 22 percent of those between 30 and 44 still carry student loan debt. The average debt for an undergraduate degree holder is $25,000, and $45,000 for a graduate degree. Seven percent of student loan holders have more than $100,000 in debt.

With the average cost of tuition and number of adults attending college increasing, those numbers will likely get worse.

Student loans can be discharged through bankruptcy

Several hundred thousand student loan borrowers file for bankruptcy each year—and those borrowers make up about one-third of bankruptcy filers. However, less than 1 percent of student loan borrowers that file for bankruptcy include their school loans in their bankruptcy petition.

The reason so few try to discharge their student loans may be misconceptions about whether those loans can be discharged. Many bankruptcy filers are convinced it is not possible to discharge their school loans, but numbers don’t bear that fear out. Half of student loan borrowers that attempted to discharge their student loans in bankruptcy received a partial or full discharge of their student loans. Those numbers suggest that more bankruptcy filers would receive a discharge of their student loans if they tried.

Student loan discharge requires an adversary proceeding

Perhaps fewer bankruptcy filers attempt to discharge their student loans because they must clear an extra hurdle. Student loans are treated unique in the bankruptcy code compared to other forms of debt. The law requires the bankruptcy court hold a hearing or trial on the issue of discharge of the student loans alone—that extra hearing adds a significant amount of work to a typical bankruptcy filing.

That hearing and pre-hearing process is called an “adversary proceeding,” which takes place within the bankruptcy case. The debtor will have the burden to prove that excluding the student loans from their bankruptcy discharge will cause them “undue hardship.”

Student loan holder must prove undue hardship

Undue hardship is proven by the debtor meeting three criteria. Those three criteria are referred to by the bankruptcy court as the “Brunner test.”

  1. Continuing to pay the loan must cause the borrower to be unable to sustain a minimum standard of living
  2. The borrower's financial situation must be unlikely to change in the future
  3. The borrower must have made a good-faith effort to pay his or her loans

The debtor will submit schedules with the bankruptcy petition that show their income and reasonable expenses. A minimum standard of living includes expenses for shelter, utilities, food and personal hygiene, clothing, health insurance or ability to pay medical and dental expenses—and even some recreation. The essence of the minimum standard of living requirement is that a debtor, after providing for his or her basic needs, may not allocate any of his or her financial resources to the detriment of student loan creditor. If after paying the basics a debtor has little to nothing left over, that should meet this first criteria.

To satisfy the second criteria, the debtor’s financial situation must be indicative of a certainty of hopelessness, not merely a present inability to pay bills. The circumstances may include illness, disability, lack of job skills, or the existence of dependents. Finally, the circumstances must be beyond the debtor’s control, not borne of free choice.

To determine whether a debtor has made a good faith effort to pay their student loans, the bankruptcy court will look at payments made, or attempts to work with lender on alternate payment plans.

If a student loan holder is considering filing for bankruptcy, that borrower should consider including the student loans within their bankruptcy filing. Because of the complexity of the student loan discharge process, those borrowers should first consult an experienced Massachusetts bankruptcy attorney to determine their best chance of successfully obtaining that discharge.

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