Student Loan Debt & Bankruptcy: The Basics

Bankruptcy law in the United States is full of complex and interesting guidelines and regulations that serve to dictate what kind of debt can or cannot be fully discharged. Some debts are exempt from discharge altogether! It should also be noted, of course, that there are various shades of grey to consider when thinking about the discharge of specific debts- sometimes debts can be discharged, but only under certain circumstances or under specific chapters or the bankruptcy code!

Because bankruptcy law can be so confusing, there are more than a few myths that have become prevalent over time. One of the most enduring and most commonly cited is the idea that student loan debt is unable to be discharged in a bankruptcy.

Do individuals commonly try to discharge their student loan debt?

Because the idea that student loan debt might not be dischargeable is so widespread, it seems as though few people even try to include this debt in their bankruptcy. A U.S. News and World Report citing a Student Loan Rangers study revealed that as few as 0.1 percent of individuals who filed for bankruptcy included their student loans – but of that 0.1 percent, 40 percent were able to have varying degrees of their loans discharged.

To determine whether or not a specific individual’s student loan debt is eligible to be discharged, judges apply the Brunner test in Illinois or the Totality of Circumstances test in Iowa.

The Totality of Circumstances Test

Under the Totality of Circumstances test the court considers the following factors:

• The past, present, and reasonably reliable future financial resources.
• The reasonable living expenses of the individual and her/his dependents.
• Any other relevant fact or circumstance surrounding the bankruptcy.

This test is more flexible and easier to meet than the Brunner test.  It looks into all the facts and circumstances surrounding the individual in order to determine whether or not the student loans constitute an undue hardship.

The Brunner Test

The Brunner test essentially attempts to determine whether or not student loan payments are high enough that they cause an “undue hardship” upon the individual in question. They do that by considering the following three questions.

• Are student loan payments high enough that the individual in question is unable to sustain a reasonable standard of living given their income?
• Is the individual’s financial situation unlikely to change for the better at any point in the foreseeable future?
• Is there any evidence that the person in question attempted a “good faith effort” in order to repay the loans?

If the individual passes the Brunner test – that is, if they answer “yes” to all of the questions – then there might be a chance that their student loan debt could be discharged. The best next step to take is to contact an experienced bankruptcy attorney for more detailed information.

How do I start?

If you are ready to begin the bankruptcy process, it is essential to reach out to an experienced bankruptcy attorney. At Buckrop & VanDeVelde, P.C. we can help you!  We will work with you to make your bankruptcy experience as quick and easy as possible. Our attorneys are professional and experienced handling all different types of bankruptcy cases. Don’t wait – reach out for expert advice today!