Student Loans & Bankruptcy

You can call this the age of the student loan. In recent months, the total amount of outstanding student loan debt surpassed 1 Trillion dollars. That's 12 zeroes. This amount now goes back and forth with credit cards to comprise the majority of unsecured debt that Americans have. The problem is, however, that while the vast majority of credit card debt is dischargeable in any bankruptcy, student loans are nearly impossible to get rid of.

It says it right there in the bankruptcy code, in 11 USC 523(a)(8), that unless it would present an undue hardship to the debtor, the court shall not discharge the debtor of educational loans. What is an undue hardship, though? For all intents and purposes, it is a standard that has made it nearly impossible for debtors to rid themselves of increasingly burdensome student loan debt.

Courts are divided on the issue and use two major tests. The first and most popular is the Brunner test. This test, named after the case it comes from, requires three factors to be met in order for there to be an undue hardship. You must first demonstrate that you and your dependents are poor, and cannot maintain a minimum standard of living if forced to repay the loans. You must show good faith in bringing the challenge. And finally, and most importantly, you must show that your current situation is likely to continue for the duration of the loan repayment period such that paying the loans back will be impossible. This burden often proves to be fatal to any challenge seeking to discharge student loan debt. Other courts use a totality of the circumstances test where they will look at all relevant factors to decide if you can discharge the student loans. These challenges also fail the vast majority of the time.

One may wonder why student loans, which have all the appearance in the world of an unsecured debt, cannot be discharged along with the rest. But with this, we have social, economic, and perhaps most importantly, political, reasons as to why student loans are given different treatment in bankruptcy. This doesn't entirely preclude your options, however, so it is still valuable to discuss these options with an experienced bankruptcy attorney.

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