Bankruptcy and Student Loans

With a new school year just beginning, students are starting back at schools and universities all over Arizona. Many people are looking into student loan options and figuring out how to finance their education. After graduation, many students can have substantial student loan debts in the thousands or hundreds of thousands of dollars, and cannot afford to make the monthly payments. When dealing with outstanding debt and student loan payments, you may consider filing bankruptcy. In most cases today, however, student loan debt is not dischargeable in bankruptcy.  A student loan debt is unsecured, meaning that there is nothing for the bank to take possession of and sell to reduce their losses. Student loan debt was not always this difficult to discharge. In the mid-1970s, student loan debt was treated the same as credit card and auto loans.

When a debt is discharged in bankruptcy, the debtor has a fresh start to live without being overwhelmed by outstanding debt and monthly payments. In contrast to many other types of debt, student loans will often survive a bankruptcy and still be the full obligation of the debtor. What some people may not know is that there is a possibility to discharge student loans in bankruptcy in extreme circumstances.

In order to discharge student loan debts, the debtor must prove that repaying the obligation would cause an undue hardship. There are standards that have to be met in order for an undue hardship to be found. The debtor must often show that there is a certainty of hopelessness that he or she would ever be able to repay the obligation. Courts use different tests to evaluate whether a particular borrower has shown an undue hardship. A common test is the Brunner test, which requires that 1.) the debtor cannot maintain a minimal standard of living for themselves and or their family if they were forced to repay the student loans based on their current income and expenses; 2.) Additional circumstances exist indicating that their financial situation is likely to persist for a significant portion of the repayment period of the student loans; and 3.) The debtor has made good faith efforts to repay the loans. Arizona Bankruptcy Court uses the Brunner test, but all three elements must be satisfied in order to have the student loan debt dismissed, and the elements are to be proven by a preponderance of the evidence. If the debtor fails to meet one of the three elements , the court’s inquiry must end with a finding of no dischargeability of the student loan debt.

Even if you cannot prove undue hardship, there is the option of repaying your student loans through a Chapter 13 bankruptcy plan. One benefit to a Chapter 13 bankruptcy is that during repayment plan, the student loans are put into a type of deferment where you are not making direct payments to your student loan lender. For some who are paying large monthly payments on their student loans, having a 3 to 5 year period of not being required to pay your student loans can help with other debt problems. In a Chapter 13 Bankruptcy, basically all of the debtor’s debts are put together into a plan. The debtor is required to pay funds toward that plan every month, and the trustee disburses payments to the debts accordingly. In most cases, however, at the close of the Chapter 13, the student loan debts will not be discharged, and the debtor will be required to begin payments again on the loans.

The Carroll Law Firm offers free bankruptcy consultations with attorneys who are experienced in bankruptcy filings. If you are interested in some information on chapter 7 or chapter 13 bankruptcy, and to evaluate your debt relief options, you can call The Carroll Law Firm Mon- Friday, 9:00am to 5:00pm to set up a free consultation.


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