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Bankruptcy and student loans: Separating fact from myth

When filing for bankruptcy, many people are quick to assume that you are not allowed to discharge student loan debt. It is rare to do so, but that doesn't mean it never happens. You can get your student loans discharged in some situations, providing you can prove there is significant "undue hardship."

At least 40 percent of filers who included student loans in their bankruptcy estate had all or some of it discharged. Only about 0.01 percent of consumers who filed, however, included student loans among their dischargeable debt.

Those who have been successful in discharging student loan debt were facing a higher level of hardship than those who were denied. Typically, these individuals are more likely to be unemployed, have a medical issue or have a lower income the year before they file for bankruptcy.

Many bankruptcy courts use what is called the Brunner test to determine consumer undue hardship. Although all courts are different, this usually includes satisfying the following three criteria:

  1. Continuing to pay the loan will make the borrower unable to maintain a minimum standard of living.
  2. The borrower's financial situation is unlikely to change in the future.
  3. The borrower has made a good-faith effort to pay back the student loans.

If you meet these criteria, you can have a bankruptcy lawyer file an adversary proceeding in addition to your bankruptcy case.

Other changes may be on the horizon when it comes to discharging student loan debt. Currently, the First Circuit Court of Appeals is considering a request to discharge student loans totaling $246,000 due to undue hardship.

If granted, the request, filed by 65 year old Robert Murphy, will not just discharge the debt, which would almost double by the time he is 77, even if he was to find a job and pay. It may also offer further definition for "undue hardship" and impact how student loans are treated in bankruptcy proceedings.

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