Yes, You Can Discharge Student Debt in Bankruptcy (but it’s REALLY Tough)

student loan bankruptcy
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You can discharge some debts, like credit cards, in Chapter 7 bankruptcy, and some, like auto loans, mortgages, student loans, you can’t. That’s what most financial websites and gurus will tell you.

But they’re leaving out some fine print that could save you a ton of money and grief: In certain circumstances, you can wipe out your student loan debt in bankruptcy.

Only around 0.1% of people who file for bankruptcy even attempt to include their student loans, according to an American Bankruptcy Law Journal report. Yet the study found that around 40% of those who sought to have their student loans discharged were successful in getting at least some, if not all, of the debt dismissed.

In other words, if you’re in very dire straights, it’s at least worth considering. While rare, there are limited circumstances that could qualify you for a full or partial bankruptcy student loan bankruptcy discharge. Here’s what you need to know if you think you might qualify.

The Brunner Test for Student Loan Bankruptcy

If you pass what’s known as “the Brunner test,” you may have a shot at discharging your student loans in bankruptcy. Named for a case involving debtor Marie Brunner in 1987, the Brunner test sets forth the standard by which a bankruptcy court could consider your student loan debt an “undue hardship” you can’t reasonably repay.

To meet this standard, your must fit all three of these criteria:

1. You’re Unable to Maintain a Minimum Standard of Living

The word “minimum” is key here. If your student loan obligations are preventing you from being able to pay for housing, utilities and groceries, they would be an undue hardship. If they’re preventing you from being able to pay your cable bill or keep a third car, the courts will expect you slash these budget items first because they’re unnecessary and/or frivolous.

2. Your Situation is Not Likely to Change

In other words, it’s unlikely you’d be able to bring in more income or cut your expenses any further in the foreseeable future. This takes into consideration your qualifications and responsibilities. If you’re no longer able to work due to illness or disability, you have a pretty strong argument.

Less cut and dry, but still arguable, would be if you’re a single parent and can’t reasonably take on a higher-paying position without sacrificing your ability to care for your family’s basic needs.

A lot depends on your personal circumstances, so always consult an attorney if you’re considering filing for bankruptcy.

3. Made a Good-Faith Effort to Pay Back Your Loans Up to This Point.

This includes making your payments on time and contacting your lenders to negotiate a more affordable repayment plan. If you’ve made every attempt you can to stay up to date on your payments and are still struggling, you may have a case.

2 Other Scenarios in Which Your Debt Could be Discharged

If your school closed before you could earn your degree or due to fraudulent practices, you may be eligible for a discharge. Check out this post for a breakdown of the specific requirements for each of these situations.

If you took out private student loans for a school that was not eligible for federal student aid programs, you could argue that these loans don’t fit the strict definition of “education loans” set forth in the bankruptcy code — and as a result, they should qualify for discharge. Again, it’s best to consult an attorney, as this can get tricky.

Some borrowers have argued they should be able to discharge any portion of their student loan funds used on “non-eligible” expenses (i.e., a laptop their school did not strictly require).

This is very risky, though, because the promissory note you signed when you accepted your loan most likely contained a clause in which you agreed to only use the funds for eligible expenses. If this is the only way you think you might qualify for a discharge, you’re probably grasping at straws and are better off reading the next section.

Alternative Repayment Arrangements

If you don’t pass the Brunner test, that doesn’t mean you’re out of luck. There are many student loan repayment options that could make your payments more affordable:

1. Deferment

Deferment allows you to put your payments on hold temporarily due to extenuating circumstances, like job loss or military service. The federal government pays the interest on subsidized loans during this time.

2. Forbearance

Forbearance allows you to put your payments on hold or reduce your monthly payment for up to 12 months due to unforeseen problems, including health issues and financial hardship. Interest will accrue during this period.

3. Refinancing/Consolidation

This allows you to combine several loans into one single loan, potentially lowering your interest rate, monthly payment and/or granting you more time to pay. Bear in mind, extended payment periods could increase the amount of interest you’ll pay over the lifetime of the loan.

4. Income-Based Repayment Plan

Income-based repayment plans, which are only available for federal student loans, take into account your current income. The lender calculates a new payment based on a percentage of your income, and after a set period of time (typically 20 years), the lender forgives any remaining debt. Learn more about income-based repayment plans here.

For more details and help determining which of these options is best for you, click here.

Beware of Scams

Scammers love to take advantage of people in tough situations who are desperate for a way out. Watch out for these signs a student loan company offer may not be on the up and up:

  • It promises ridiculously low payments. As the saying goes, if it sounds too good to be true, it probably is.
  • It offers to work with your lenders on your behalf. No company can get you a deal better than you can get by working directly with your lenders — but many companies are happy to charge you a fee for trying.
  • It wants to change your account contact info to its own. Never agree to be cut out of the loop on your own loans.
  • It wants to charge you a fee. Federal law requires lenders to work with you to make sure your payment terms are reasonably affordable. No additional fee will give someone else the power to magically do this better than you would.
  • The name or logo looks a little too familiar. Scammers often rip off well-known companies to make themselves appear more legit. Just because a company’s name has the word “American” or “National” in it, that doesn’t mean they’re reputable. As with anything, do your research on the company before agreeing to anything.

Your Turn: What strategies have you found to ease your student loan repayment burden?

Kelly Gurnett is a freelance blogger, writer and editor who runs the blog Cordelia Calls It Quits, where she documents her attempts to rid her life of the things that don’t matter and focus more on the things that do. Follow her on Twitter @CordeliaCallsIt.