One of the questions I get asked most as a bankruptcy attorney is, can I discharge my student school loans in bankruptcy? Most bankruptcy attorneys will tell you that it’s not possible, but this is simply not true. The process to discharge debt associated with your education is not a simple or automatic process, it takes some effort, but is well worth it in the end to discharge some or all of your student debt. Section 523(a)(8) of the US Bankruptcy Code states that student loans are exempt from forgiveness, unless it poses an “undue hardship.” For the vast majority of people who have a five figure student loan or loans, paying the exorbitant fees every month certainly feels like an undue hardship, but the bankruptcy court interprets the term of “undue hardship” very specifically. But the good news is that recent cases have been coming out that give students with loan debt some hope for relief.
The simple fact is, that most bankruptcy attorneys will tell you that it impossible to discharge such debts in bankruptcy, is either inexperienced or simply not wanting to go through all the trouble to do so. This is why it is so important for you to find an experience bankruptcy attorney, not simply the cheapest one you find in your Google search. The following is a brief explanation of some of the requirements to discharge your student loans in a Chapter 7 Bankruptcy.
Your first step in obtaining a discharge on your student loans is requesting a discharge. Most people are under the erroneous belief that you cannot obtain forgiveness of these loans, so most never try and most bankruptcy attorneys have no idea of what I’m about to tell you. Here are some interesting statistics to prove this point. According to a Harvard Law School study of people who have student loans and file for bankruptcy, out of that group of people, 99.9% of them never attempt to discharge this debt in their bankruptcy filing. That in itself is a staggering figure. Of those that actually request to have the student debt discharged in bankruptcy, 40% are granted either a partial or total discharge of their loans by the bankruptcy court. Now think about that for a minute, almost half of everyone asking for a discharge of their student loans are receiving them, but 99.9% of people with student loans who file for bankruptcy never even ask. This equates to approximately 70,000 people who file for bankruptcy each year qualify to have their student debt discharged or partially discharged, but only 0.01% of those 70,000 even try. This means 28,000 people a year who could discharge their student debt in the bankruptcy petition they file, never even try. Let that sink in for a minute people…
The second and possibly most important aspect of obtaining a discharge for student debt is, do you qualify? The most commonly used test for determination if a student loan qualifies for a bankruptcy discharge is called the Brunner Standard. This standard is based on the following case: United States Court of Appeals, Second Circuit. Marie BRUNNER, Appellant, v. NEW YORK STATE HIGHER EDUCATION SERVICES CORP., Appellee. No. 41, Docket 87-5013. (Cite as: 831 F.2d 395) the ruling of this case has given us three circumstances that must be demonstrated for a person attempting to discharge student debt to qualify. These rules are as follows: 1. If you were to repay your student loans, you would not be able to maintain a minimum standard of living for yourself and/or your family; 2. The financial circumstances that led you to be unable to afford your student loans is likely to be present throughout the remainder of the repayment period of those loans; 3. You have attempted in good faith to pay back your student loans. If you can simply satisfy the three standards, it is certainly worth your time and money to attempt to have your student loans partially or completely discharged in bankruptcy.
The third criteria, if you wish to obtain forgiveness on these debts through bankruptcy, you must take extra steps, which are not covered under your usual attorney client retainer agreement for filing a bankruptcy. What does this mean to you? It means that besides for filing for bankruptcy and the normal legal fees and filing fees associated with that, there will be additional legal work that will need to be paid for this service, outside of the attorney-client retainer agreement for your standard bankruptcy. With the vast majority of debts that are usually filed in bankruptcy, you simply list them in the schedules of the bankruptcy petition. This is not the case for student loans, with student debt your bankruptcy lawyer must file what is called an “adversary proceeding” in bankruptcy court. These adversary proceedings are actually a completely separate lawsuit, filed in bankruptcy court, associated with your bankruptcy filing petition. Essentially what this is, you file a lawsuit against the lenders who own your student loan debt, in order to get some or all of that debt forgiven. It is extremely important to understand that this is a very complex area of law, and one that you should always have an experienced bankruptcy attorney working for you. Many people attempt to file for bankruptcy on their own, I would never suggest this, I will not even attempt to describe this process, as it is not within the scope of this article. Get yourself an experienced bankruptcy lawyer to help you do this.
The fourth important thing that was determined by the Harvard Law school study, which are characteristics that are common to almost all bankruptcy cases that student loan was forgiven are as follows: 1. The debtor (the person filing for bankruptcy protection under the US Bankruptcy Code), was more likely than not, unemployed; 2. The debtor usually had some form of medical hardship, which contributed to this situation; 3. the debtor usually had a lower income than the previous year they filed their bankruptcy petition. These are not clear-cut requirements, which have been described previously in this article, but these are facts that were most likely common to all bankruptcy filings that resulted in the discharge of student loans debt.
Finally, the last important part of the equation is that you must file for Bankruptcy under Chapter 7 of the US Bankruptcy Code. The two most common forms of bankruptcy used are Chapter 7 Bankruptcy and Chapter 13 Bankruptcy. In a Chapter 13 Bankruptcy you (with the help of your lawyer) establish a debt repayment plan (which must be accepted by the Bankruptcy Court), in which you repay a portion of your unsecured debt based on your income and expenses, over a three to five-year period. In a Chapter 7 Bankruptcy you are allowed immediate forgiveness of these unsecured debts, with a few exceptions such as student loans, alimony and child support. To file the adversary proceeding that was described previously in this article, you must be in a Chapter 7 Bankruptcy. This option is NOT available in a Chapter 13 Bankruptcy.
In conclusion, if you think you fit the requirements described in this article and are receiving undue hardship due to the repayment of your student loans, then bankruptcy is an option you should look into. This is why it’s so critical to find an experienced bankruptcy lawyer who understands the US Bankruptcy Code. As in another article I previously published about discharging income tax debt in bankruptcy, discharging student debt is another little-known fact about bankruptcy law that only an experienced bankruptcy attorney would know. One good way to determine if you’re sitting in the office of an experienced bankruptcy attorney is to ask one of the two following questions: Can you discharge student loans in bankruptcy? or Can you discharge income tax debt in bankruptcy? If either of these questions is answered in the negative, you are in the office of the paper pusher and not an experienced bankruptcy attorney. Like anything else in life, you get what you pay for, and shopping for attorneys based on price is a very costly way to learn this life lesson.