Bankruptcy Blog

20 January 2014

What happens to student loans under bankruptcy?

Student loans, while dischargable under bankruptcy law, really must meet standards significantly above typical standards for debts that can be discharged.  This strictness is due to the fact that some people began seeking bankruptcy protection after they graduated from college but before they started jobs with good salaries.  In the late 1970s, bankruptcy codes began to be narrowed so people could not abuse the system in this way. 

A separate legal filing also is required to have a court consider the discharge of student loans.  While you may meet an "undue hardship" standard for many other types of debt, student loans also must meet additional significant standards of hardship.  For example the length of the hardship is important to be able to discharge student debts.  The hardship must be long term in nature - like a disability that prevents work - that would prevent earning good income to meet a minimal living standard.  

In most jurisdictions the bankruptcy court will use what is known as the "Brunner" test, which requires you to show:
  • You cannot pay your student loans and maintain a minimal standard of living
  • Your circumstances (often disability related) are such that the hardship is long-term and not within your control
  • You have made good faith efforts to repay your student loans 
Student loans can be burdensome, but they are also a means to attain education that usually leads to people to higher paying jobs.  Lawmakers and judges look similarly to these financial gains that generally limit the amount of student loans that can and should be discharged due to less than severe hardships.  However, if circumstances are severe, a court can make a favorable ruling to forgive student loans. 
Steven H. Phelps  

Steven H. Phelps

Mr. Phelps was admitted to the Texas State Bar in 1992. His early litigation practice was concentrated in the areas of business law, banking and financial services, real estate and labor law. Since 1995, Mr. Phelps enlarged his practice to include the areas of estate planning and title services and most importantly, personal bankruptcy.

Call Steven today to talk about your individual situation during a free consultation.

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