Discharging student loans in bankruptcy

| Jul 22, 2021 | Bankruptcy |

When a debtor in Oshkosh, Wisconsin, sees no way out of their debt, they may be able to get relief through bankruptcy. Student loans follow close behind mortgages as the highest consumer debt, and debtors commonly have concerns about discharging this kind of debt. While it isn’t impossible to get student loans dismissed, it can be tricky.

Student loans in Chapter 7 bankruptcy

A debtor cannot file bankruptcy for a single type of debt, so they must include all debts on a petition. Chapter 7 removes unsecured debts through selling non-exempt assets, so eligible loans can be included.

To discharge student loans, the debtor must prove they have an undue hardship to the court. The court may apply the Brunner test to determine if the debtor has a hardship. The Brunner test requires the debtor to prove some factors:

  • The debtor could not maintain a basic standard of living if they had to pay student loans.
  • The debtor made an honest effort to repay the loans.
  • The debtor can prove that their situation will not improve soon.

The debtor also must file an adversary proceeding. This is a hearing to determine eligibility.

Student loans in Chapter 13

Chapter 13 is debt-restructuring bankruptcy, allowing the debtor to devise their own repayment plan. If the court approves the plan, the debtor commonly has three to five years to complete the plan. The debtor makes one monthly payment to the trustee, which gets divided among creditors. Since student loans are commonly not a priority, the trustee pays them on a pro rata basis, meaning in proportion.

Chapter 13 doesn’t require the debtor to sell assets, but the debtor must maintain payments to avoid losing property. Debtors also must have sufficient income to pay their debts and not exceed the debt limit.

Not all student loans can get discharged in bankruptcy; the debtor may still owe the remainder. For this reason, an individual should consult an attorney to discuss their options for debt relief before filing for bankruptcy.