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Student Loans

Dealing With Student Loan Debt and Bankruptcy

The relationship between student loan debt and bankruptcy is a complex one. Sadly in many cases today, these loans are becoming one of the highest causes of bankruptcy in college-attending Americans. With debt of this kind soaring, even exceeding the levels of credit card debt in America for the first time in history, it is the right time to start better understanding the relationship between these two financial forces.

Debt and Bankruptcy

Sadly, student loan debt cannot be discharged in bankruptcy filings (though there are some exceptions), despite the fact that student debt pushes many into filing in the first place. Instead, the prevailing wisdom about student loan debt has been to forgive it, allowing students to pay off 10 percent of their income over the course of 10 years, and then forgiving the rest. Some call this the 10-10 standard. Others would like the forgiveness idea to be overturned and a more direct line between these types of loans and bankruptcy to be restored.

Exceptions to the Rule

In most cases, student loans are not taken away by bankruptcy, but there are exemptions in place.

One of these conditions is referred to as the "undue hardship exception" and requires those applying for this exception to demonstrate that it would be an unnecessary hardship for them to pay off their loan amounts, no matter the level or rate. Essentially, someone attempting to get this exemption would need to show that they would be unable to provide for their dependents or themselves unless their student loan debts are allowed under the conditions of bankruptcy.

A test used for the Undue Hardship Exception is called the Brunner Test, which requires all of three factors to be met. The first factor is to show that the minimal standard of living cannot be maintained. The second is to show stable financial situation for the duration of repayment. The third and final is to show that a reasonable and realistic attempt has already been made to pay off student loan debt. If all three of these conditions are met, many courts will allow for the Undue Hardship Exception, placing student loan debt under the purview of bankruptcy filing.

Before attempting such an exception filing, you should consult with a bankruptcy attorney. Many of these attorneys are already qualified to deal with such an attempt and will be able to give you advice on how to appeal to allow student loan debt to become a part of your bankruptcy filing.