According to U.S. News & World Report, there is a common misconception that bankruptcy filings cannot include student loans. In fact, bankruptcy can discharge these loans, provided filers can exhibit undue financial hardship.
While it is more challenging to discharge student loans through bankruptcy, it is not impossible. Here are a few important points to keep in mind.
How to tell if your student loans qualify for discharge
The first step is to compare your financial situation to the standards set forth by the Brunner test, which has three separate components. First, consider if repaying your student loans will negatively impact your ability to cover basic living expenses for you and any dependents. Second, consider how long this financial situation will persist, i.e. whether it will last the duration of the student loan repayment period. And third, consider if you have made good faith attempts to repay these loans before you decided to file for bankruptcy.
How to have student loans discharged in bankruptcy court
Upon meeting the above criteria, the next step is to file for chapter 7 or 13. Chapter 7 discharges all qualifying debt, while chapter 13 creates a debt repayment plan. In addition to the bankruptcy filing, you also need to file an adversary proceeding lawsuit to include your student loans.
The judge will apply the Brunner test to your situation, while also looking at other relevant factors. If they agree with your claim of undue hardship, they may choose to completely discharge your student loans. However, they can also reduce the loan amount and require you to pay the lower amount, or reconfigure the loan, so the interest rate is lower.
No matter which option you choose, you must take swift action when you cannot pay back your student loan. Make sure the lender is fully aware of your financial situation as soon as possible, and think carefully about which option is best for you.