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What Are Your Options When Filing for Bankruptcy on Student Loans?



By:Mike Cibik

Can You File Bankruptcy on Student Loans?


If you’re like the millions of other Americans who wanted to get a quality education, chances are you signed up with a creditor to pay for your college tuition. Gone are the days of getting through college for a couple of thousand dollars; today’s young students are piling on debt at rates that are several levels of magnitude larger, with some students getting total loans in excess of $100,000 and up on their college price tag.


While a college degree can get you far, many are looking at their present situations and finding that it isn’t as easy as they hoped it would be to repay their debts. Wage rates have stagnated even for collegiate level jobs, and the American Economy has been uncertain since 2008.


These days, even the best and brightest college graduates can’t repay sometimes. With the laws pertaining to college loans in place as they are, student loan creditors seem to be undeniable. The loans must be paid back, with interest.


The calls start right after you graduate. A deferment is only an option so many times, and even with deferment comes the interest owed – and on a $100,000 total, that interest can be scarily high. The creditors set the terms, but… what if you didn’t have to work on student loan creditor’s terms?


As of this writing, there is a grand total of $1.4 trillion tied up in student debt alone. It accounts for a total of 11.16% of the total household debt (based on America’s total household debt of $12.54 trillion). Many young Americans have difficulty coping with all of the debt – they’re gaining much more debt than previous generations of college students did.


You’ve probably also heard that student loan debt is untouchable – bankruptcy will not clear away the debt, and no matter what, you’re paying back that money. But, like most things you hear second hand, it’s not the whole truth. There’s more to the situation than might first meet the eye.


Student Loan Debt Bankruptcy 101

Let’s cover the big fact first: it is very difficult to declare bankruptcy regarding student loan debt, and the likelihood that you’d be able to is very low – only about 40% of those filing for bankruptcy including student debt are approved. Times have to be exceedingly hard for this type of debt to be forgiven.


However, there is a possibility that you could manage to get the debt restructured through both types of bankruptcy. To understand why you have to understand the differences.


Chapter 7 Bankruptcy

When you apply for Chapter 7 Bankruptcy, you’re looking to not only stop creditors from harassing you, but you’re looking to clear out all debt. The person filing is in a position in which they have little to no income or assets and cannot pay the debt. The result is usually a cancellation of all debt and the repossession or liquidation of any applicable assets. This is generally the kind of bankruptcy that leaves the most lasting effect on your credit.


Chapter 13 Bankruptcy

When you apply for Chapter 13 Bankruptcy is similar in that you’re looking to make creditors stop harassing you, but things aren’t as dire. You likely have a form of income or assets you can liquidate to pay back the debt – you just have to restructure that debt in order to make good on your payments. It’s less likely that you’ll lose all of your assets and property since you’re making good on the debt, just in a different way.


How it Applies to Student Debt

Your bankruptcy type matters because of the circumstances of whether or not your debt applies. The reason is based on a precedent set in 1987. This precedent states that if you are in a position in which paying the debt owed poses an obstacle to meeting a minimum standard of living, the debt may be absolved.


The tricky part of filing for bankruptcy is proving that hardship – a proposition that varies from court to court and judge to judge. This is where the Brunner Test comes into play. Passing the Brunner Test is based on:

  1. That the debtor[s] cannot maintain, based on current income and expenses, a ‘minimal’ standard of living for [themselves and dependents] if forced to repay the loans.
  2. That additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans.
  3. That the debtor[s have] made good faith efforts to repay the loans.

Let’s unpack the items there to understand better the situations that must be upheld.


Maintaining a ‘Minimal’ Standard of Living

The first portion of the Brunner Test requires proof that a minimal standard of living is impossible while trying to repay the debt. The interpretation of this can vary as mentioned earlier, but it can be assumed that the situation has to be dire under the present circumstances. If the debtor and their dependents would not be able to keep a roof over their head as things stand while making good on the debt, it’s more likely to pass the first part of the Brunner test.


Additional Circumstances

Part two of the test notes that there must be additional circumstances that are not likely to be resolved over the course of the repayment. This could mean a lot of things. If you have a disability (either existing before or after the debt) if you are expected to care for someone who otherwise cannot care for themselves, if you have been injured in such a way that you can no longer work, all of these are examples of passing criteria.


Good Faith                                        

The third criteria for the Brunner Test is probably the easiest part to provide. Creditors, if nothing else, are likely to meticulously track exactly how much is owed to them, and how much any of their debtors have paid. Good faith usually can be interpreted to consist of repaying something – even if only partially – over a significant portion of time.


So, You’ve Passed the Test – Now What?

If you’re applying for Chapter 7 Bankruptcy, chances are better that you’re fulfilling all of the criteria provided you’ve been paying something to your creditor(s). If you’re injured or disabled, It’s also less likely that you have regular income enough to maintain the standard of living mentioned in the first part of the Brunner Test. Liquidation of applicable assets via the bankruptcy will provide most of what you need to prove that you are going to be facing undue hardship.


If you can’t prove the hardship component but can show good faith, you’re not necessarily out of luck. You can still work toward Chapter 13 to give you the breathing room you need to pay back your student loans. This route won’t liquidate your assets and allows your debt to be restructured so that you can work your debt out in a way more favorable to you.


How Can I Move Forward On Student Debt Bankruptcy?

You’ll need a lot of patience, you’ll need documentation, you’ll need to know the facts about bankruptcy, but most importantly you’ll need the help of an experienced bankruptcy lawyer.


Cibik & Cataldo P.C. have over thirty years of bankruptcy law experience to assist you in taking the best route to repairing your financial situation. Contact us at 215-735-1060 for a free consultation. Alternatively, you can visit our website and submit a form regarding your case.  


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