Student loan debt continues to be one of the more pressing issues of the day, which is significant for numerous reasons. One reason is because it shows the sheer extent of the student loan debt problem. Student debt has become such a powerful force for so many people, but it has become a near dominant force in the lives of those from the millennial generation and later generations. President Biden just recently extended the pause of student loan payments, which shows the importance of this matter for the country as a whole. Now, with the economy still rebounding slowly and unevenly, many people with student loan debt are wondering: are student loans always non-dischargeable in bankruptcy?
In this post, we will go over the criteria for discharging student loan debt in Chapter 7 bankruptcy. As we will see, discharging this debt is far from easy, but it’s also very possible depending on the circumstances.
Critical Point: Most Student Loans Cannot Be Discharged
This is definitely something which student loan debtors should nail down: as a general rule, student loan debt falls into the category of being “non-dischargeable,” which means that it is not unlike debts such as “support obligations” (i.e. child support and alimony), debts acquired via fraud, and so forth. However, student loan debt is unique because this type of debt may be discharged, but only under specific circumstances. The key point here, though, is that under normal circumstances, such debt cannot be wiped out in a standard Chapter 7 bankruptcy process.
Student Loans Require a Separate Bankruptcy Hearing
If a debtor wishes to have the bankruptcy court consider discharging his or her student loans, then he or she needs to initiate a separate proceeding within a Chapter 7 bankruptcy. Basically, a separate trial needs to take place in which the debtor explains why the debt should be released, and the creditor explains why the debt should remain. This is referred to as an “adversary proceeding,” and it requires a separate complaint. Both the debtor and creditor will have time to gather information and prepare their case. Ultimately, the bankruptcy judge will make a determination about the dischargeability of the student loans, and that determination will depend primarily on your ability to (reasonably and comfortably) pay back your loans.
The Tests for Dischargeable Student Loan Debt
Basically, the outcome of the adversary proceeding hinges on the debtor’s ability to pay back the student loans. If, under relatively rare circumstances, the debtor qualifies for the “undue hardship exception,” then the bankruptcy judge may declare the student loans to be dischargeable and allow them to be wiped out. There are several legal “tests” which can be used in this type of analysis: the Brunner test, the “totality of the circumstances” test, and other tests as well. The Brunner test basically looks at 3 factors – poverty, persistence, and good faith – and, if all factors are present, then the student loan debt is likely acceptable for discharge. A judge will examine how likely your student loan debt will keep you in poverty, how likely your financial condition will remain the same, and whether you’ve made a good faith effort to repay your debt thus far.
The totality of the circumstances test is a bit more ambiguous, but essentially a judge will review all relevant factors and determine whether the given debtor should be allowed to release the student loans under the exception. As mentioned, there are other tests as well, and courts have some discretion in which tests they use, and also whether they allow all or just a portion of the debt to be dissolved.
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