No, bankruptcy does not cover student loans. Well, at least bankruptcy does not “get rid of” student loans. This is the starting point in the discussion regarding educational loans and bankruptcy. While student or educational loans are not discharged by bankruptcy, most clients find that filing a bankruptcy provides them with the powerful relief they need from other debt such as credit card debt and medical debt. With those items out of the way, most clients find they can actually make their student loan payments. Additionally, as discussed below, Chapter 7 and Chapter 13 will typically allow you to pause your payments on student loans while your bankruptcy is active.
The Exception To The Rule
Every rule has exceptions, and the same is true of student loans in bankruptcy. If you can prove that the payment of the loans will pose an undue hardship on you and your dependents, you may be able to get your student loans discharged in bankruptcy. Courts use the Brunner Test to determine if an undue hardship exists. It requires showing that: a) the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for the debtor and the debtor’s dependents if forced to repay the student loans; b) additional circumstances exist indicating this state of affairs will persist during the remainder of the repayment period, and c) the debtor has made good faith efforts to repay the loans. Brunner v. New York State Higher Educ. Servs. Corp., 831 F. 2d 395 (2d Cir. 1987).
Debtors can expect a vigorous defense to be put on by attorneys representing the lenders in these situations, and the cost of litigating this issue combined with the low chance at success leads most individuals to simply accept that these loans aren’t going away in bankruptcy.
How Does Bankruptcy Help With Student Loans
There are a few ways in which bankruptcy does help with student loans.
Chapter 7 Pauses Your Student Loans – During the roughly 120 days your Chapter 7 is open with the court, your student loan lenders are not allowed to attempt to collect money from you. This is due to the Automatic Stay in bankruptcy. This provides a welcome break from your loans for a few months. You can expect collection attempts to continue after the Chapter 7 closes.
Chapter 13 Options – In Chapter 13, you can elect to include your student loans in the Chapter 13 to be paid as unsecured debt. This amount is typically pennies on the dollar compared to what you’ve been paying. This is the equivalent of putting the loans on pause, much like in Chapter 7 above.
What Are The Next Steps
Take 15 minutes to have a free phone consultation. You will Speak with a bankruptcy attorney about your loans and other debts which are causing you to consider bankruptcy. Bankruptcy is a very powerful form of relief which immediately changes clients’ lives or the better. We are happy to discuss your options with you and there is no charge for the phone call—we’re happy to help. Call us at 704.749.7747 or click HERE to request a call from us. We know you have choices, we hope you choose to Recover With Us.