Part of the American Dream is going to college and building a successful career. For most of us, that means taking out at least some student loans. We figure with all the money we’ll be making in our career, the loans will be no problem and completely worth the investment. In many cases, this is true. Education is one of the best investments a person can make. But sometimes following your educational and career dreams leads to a job you enjoy, but doesn’t necessarily make a lot of money. Or perhaps your chosen career is not as viable as you had hoped. Student debt can become crippling to the other aspects of the American Dream such as home ownership, vacations, and retirement.
So what do you do when your student loan debt becomes too much to deal with?
Traditionally, student loans have not been included in bankruptcy. But that is not always the case. It actually is possible to have these loans discharged in bankruptcy, but there are strict guidelines that must be met. In order to have your loans forgiven, you have to specifically ask by filing an adversary proceeding, which is a separate case from the bankruptcy. Most people don’t even bother to ask because they have always heard that student loans cannot be included in a bankruptcy.
Most courts use the Brunner Test to determine if you qualify for student loan forgiveness. The point of this test is to show that repaying the loans would cause an undue hardship. In order to pass the Brunner Test, you need to prove that:
1. You’ve made good faith efforts to pay off the loans.
2. Paying off the student loans would be such a burden that you could not maintain a basic standard of living.
3. It is unlikely that your financial situation will change/improve within your repayment period. Payments will continue to be a hardship.
If you pass the Means Test for a Chapter 7 Bankruptcy, there is a chance that you can include your student loans. This can “wipe out” the debt, whereas filing a Chapter 13 will give you 3-5 years to get caught up on your student loans. Most courts take a detailed look at your financial status and tend to be strict about discharging student loans. Sometimes the entire debt cannot be forgiven, but a court will grant a partial discharge, which reduces payments. The complexities of negotiating this type of settlement make it very important to hire an experienced attorney you can trust to represent you well. Your bankruptcy attorney is there to help evaluate if you qualify for student loan forgiveness and will ensure you have the best possible outcome.