While it used to be easy to discharge student loans as part of a bankruptcy filing, many believe that the laws have changed so significantly that student loans can never be discharged and must always be paid back by the borrower. It has become much harder to include student loans in a bankruptcy, but it is still possible to discharge student loans if certain criteria are met.
The courts take into consideration three factors: poverty, persistence, and good faith. This is the Brunner Test, and to get student loans forgiven, the borrower must meet all three factors.
First, you must be poor. The court will consider your current income and expenses. If you prove that you will be unable to maintain a minimal standard of living if you have to include student loan payments in your monthly expenses, you will meet the first criteria for getting student loans forgiven.
Second, persistence is considered. Persistence is the length of time your current income and expense are expected to remain the same. If your financial situation is not expected to change during the lifetime of the repayment period, you will have met the second criteria for getting student loans removed from your overall debt. A good example would be if you are living on disability and your disability is a permanent condition. Having a job that has a lot of potential for growth would show the court that you have the potential ability to pay back your student loans in the future.
The third is good faith. You must be able to provide documentation to the court that you have tried hard to pay back your student loans but that you are unable to keep up with payments. If you’ve never made a loan payment, it’s impossible to show good faith to the courts. Generally the court likes to see that you have made an effort to pay back student loans for a period of at least five years before they will consider discharging this debt in a bankruptcy.
Educational debts are discharged by filing an adversary proceeding. This is an additional step to filing for either chapter 7 or chapter 13 bankruptcy and many people don’t file because it gets expensive to fight this proceeding in court. Borrowers who have student loan debt they are unable to pay back often believe that there isn’t a way to get student loans discharged so they don’t bother to file.
Student loans can be discharged, either in full or at least partially. It takes time, preparation, and money to get student loans wiped out but if all conditions are met, borrowers who legitimately can’t pay back their student loans can find relief in bankruptcy court.