When Can Student Loans Be Discharged in Bankruptcy
Student loans are generally not dischargeable in bankruptcy, although there may be other options available to make your student loan debt more manageable. See my article entitled, “Student Loans.”
Bankruptcy Courts allow your student loans to be discharged only if repaying them would be an undue hardship. You need to file what is known as an adversary proceeding inside your bankruptcy to have the Court determine that your student loans are dischargeable, and then the Court needs to find that there is an undue hardship.
The United States Bankruptcy Code does not define what constitutes an undue hardship, so bankruptcy courts have had to decide what situations make for an undue hardship. The standard used by the Bankruptcy Court in this district is the Brunner test. It is a three-part test, and you must satisfy each of the three parts in order to have your student loans discharged.
Part one is that you would be unable to keep a minimum living standard if you had to pay back your student loans. This means when you take your monthly income and subtract your monthly expenses, what you have left over at the end of the month is less than the monthly payment on the student loan debt.
Part two is that your financial situation is likely to continue for a large part of the student loan repayment period. The Court looks at your circumstances as a whole, and looks at twelve factors: (1) Disability; (2) Care for dependents; (3) Limited Education; (4) Poor quality education; (5) Lack of marketable job skills; (6) Underemployment; (7) Maximized potential in field; (8) Few work years remaining; (9) Age; (10) Lack of other assets; (11) Potentially increasing expenses; and (12) Lack of better financial options.
Part three is that you have made good faith efforts to repay your student loan debt. It helps if you have made payments on your student loans in the past when you were able to do so. It is a difficult matter
if you have never paid on your student loans. It helps if you have looked into income-based repayment plans for your student loans. There are a number of cases which illustrate facts in which the good faith factor has been satisfied. There are also a number of cases which set forth facts in which the good faith factor has not been satisfied.
The above information is a general overview and is not intended to be used as legal advice. If you are considering filing for bankruptcy, the best thing to do is call our office at 248-557-3645 and schedule a free consultation so you can receive advice which is tailored to your specific circumstances.
By: Michael Benkstein, Esq.
Managing Attorney, Bankruptcy Department
The Law Offices of Joumana Kayrouz, PLLC