When debt becomes overwhelming, and you cannot reasonably pay it back, bankruptcy can help you get a handle on your life. It is possible to discharge many types of debt during bankruptcy, including credit card debt, medical bills, and personal loans.
When it comes to discharging student loan debt, the process becomes a lot more complex. It is possible to discharge debt related to federal student loans, but you must meet certain criteria in order for the court to include the debt in your case. This guide explains what you need to know about student loans and bankruptcy.
Proving undue hardship
Courts require bankruptcy applicants to prove that repaying their loans would create an undue hardship. It is up to the discretion of each court to determine what undue hardship means. In general, it points to an inability to repay debt without affecting your basic living expenses. That means making your payments may imperil your current living situation or your ability to care for yourself or your family.
Understanding the Brunner test
One method courts use to determine undue hardship in bankruptcy cases is the Brunner test. There are three components of the Brunner test, and applicants must meet all three to qualify.
First, paying your student loan debt is not possible on your current income, at least not without impacting your standard of living. Second, this financial situation is likely to continue for the remainder of the debt repayment period. And finally, you must show that you have made every effort to repay the loan despite your financial situation.
In the event the court approves your case, you may receive a full or partial discharge of your debt, depending on the particulars. You may also receive a debt reorganization plan, which entails a repayment period ranging from three to five years.