There is a lot of confusion regarding whether overwhelming student loan debt can be discharged when a person files for bankruptcy.
While more challenging than erasing other types of debt, discharging private and federal student loans is possible, although it requires an added step.
How the process works
First, it’s a good idea to talk to an experienced bankruptcy attorney who can address your unique situation, including determining whether Chapter 7 or Chapter 13 is the best option. Your lawyer will also ensure all paperwork is filed correctly. Two steps follow:
- Bankruptcy filing: You must first file for Chapter 7 or 13 before addressing outstanding student loans.
- Adversary proceeding: Dismissing student loan debt through bankruptcy requires an additional lawsuit, known as an adversary proceeding. Your lawyer writes a complaint explaining your argument to discharge the debt.
Proof of “undue hardship”
To erase student loans, you must prove that they present an undue hardship to your financial well-being. While that is not clearly defined under bankruptcy laws, most courts accept the “Brunner test” as a means to determine whether the argument is valid. This contains three elements:
- Continuing to make loan payments keeps you from having a “minimal” standard of living
- It is likely that your economic hardship will remain for most or all of the loan’s term
- You’ve made every effort to repay your loans in “good faith”
You must prove all three parts of this test to be successful.
Focus on a fresh start
While dismissing student loan debt can be more complicated, it’s not impossible. A 2012 study in the American Bankruptcy Law Journal found that more than a third of the people who filed won a full or partial discharge. Taking action as soon as possible can help put you on the path for restoring your credit and financial freedom.