Repayment of student loans is not easy. One for every 5 borrowers with outstanding student debt is lagging behind their payments. Can you file bankruptcy for school loans?
Most debtors will not be able to remove student loan debt in the event of bankruptcy in Chapter 7 or Chapter 13. However, if you can prove that repayment of student loans would cause you excessive difficulty, you can get rid of student loans in bankruptcy.
Excessive effort exception
In order for a student loan to be released from bankruptcy, you must demonstrate that it would be too difficult to pay it back. The test to determine unreasonable difficulties varies from court to court. In addition, many courts see the test of unjustified hardship as all or nothing – either you qualify for the entire loan or not. Other courts have exempted some of the student loan from the debtor.
Regardless of the test used, most courts are reluctant to grant student loans. However, if you have a very low income or the loan comes from a profit-oriented commercial school, you may have a better chance.
What qualifies as “excessive difficulty”?
Unfortunately, the bankruptcy law is not clear, which will cause “excessive difficulty”.
“Congress has never defined what it means excessive difficulty,” says Kantrowitz. “They left it to the courts to define.”
Bankruptcy courts can apply two different tests to decide if the borrower is experiencing excessive difficulty – the Brunner test and the Totality of the Circumstances test. According to Kantrowitz, the Brunner test is much more widely used.
As part of the Brunner test, the debtor must prove three things.
- He cannot maintain a minimum standard of living for himself and his dependents on the basis of current income and expenses, if he is forced to repay the loans.
- There are additional circumstances indicating that this state of affairs is likely to persist for a significant portion of the student loan repayment period.
- The debtor tried to pay back the loans regularly.
The procedure for canceling a school loan in bankruptcy
If you want to try to pay back a student loan in bankruptcy, you must file an opponent with proceedings to determine repayment possibilities in the bankruptcy court. But it is not everything. You must provide evidence and prove in court that repayment of your loans will cause excessive difficulty. You will most likely have to hire an expert who will certify your ability to work for the future.
What happens if school loans are not released?
If, as in most cases, your loans are not released from bankruptcy, here’s what happens.
Chapter 7 Bankruptcy. In Chapter 7 on bankruptcy, if repayment of your loans is not an excessive difficulty, you will still owe them after the bankruptcy case is over.
Chapter 13 bankruptcy. If you can’t repay student loans, bankruptcy in Chapter 13 provides other ways that can help. For example, you will most likely be able to pay a reduced amount under Chapter 13 – although you will have a problem with the remaining amount after the repayment period.