A Guide to Understanding Student Loan Debt & Bankruptcy
Student loan debts have become one of the most pressing financial concerns for an entire generation of Americans. So much so that reform and other issues have become hot-topic political issues, and may even figure into the upcoming presidential election.
For individuals currently facing that financial crunch, and looking for solutions, turning to bankruptcy may offer relief. Most people don't understand the rules that apply though, which is why most common questions related to the matter include "does bankruptcy discharge student loans?" and "can you file bankruptcy for student loans?" This guide will explore these topics in greater detail to help inform those who may be in such a situation.
The big key for determining whether or not bankruptcy discharges student loan debts in your circumstances is to see if you meet the rules to qualify for the undue hardship exception. There are actually several different tests that courts use, and which applies to you depends on where you live and where you're filing bankruptcy on your student loans.
One such test is known as the totality of circumstances test. This is essentially an overall look at all financial factors involving your situation, and to see if you qualify as someone whose loans are placing them in a position of undue hardship.
Another test is a bit more specific in its rules, and is known as the Brynner test. Three different factors must be met. First, that you're in poverty, and that you cannot maintain a minimal standard of living, second, the persistence of these conditions is likely to continue, and third, that you have previously made a good faith effort to repay your loans.
There may also be other specific tests and measures utilized, also dependent on where you're filing. Either way though, if you don't qualify for undue hardship, then does filing bankruptcy for student loans provide you with any other benefits?
The answer here may be yes. For instance, the automatic stay kicks in immediately after filing, whether you qualify for undue hardship or not. With chapter 7, you'll discharge other debts that have mounted up, reducing your overall burden. With chapter 13, you'll be able to devise a new monthly repayment plan that is more manageable and realistic based on your actual income. It can also provide you with what amounts to a 60 month "deferment" or reprieve from your student loans, as you will not be responsible for paying them while in Chapter 13.
It's always essential to consult with a local professional such as an experienced bankruptcy attorney before deciding to take action one way or the other. But hopefully the above information has provided you with more clarity on the rules surrounding bankruptcy and student loans.