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As student loan debt increases, discharge in bankruptcy hasn't gotten any easier

Between 2005 and 2012, the burden of student loan debt grew from $364 billion to $904 billion, an increase of 13.9 percent annually. Student loan debt, some economists predict, may be a ticking time bomb. This may or may not be the case. Whether or not student loans are the next bubble getting ready to burst, they can be a serious problem for many borrowers.

Graduates that come out into a poor economy are finding it very difficult to pay back their loans when they can't find a job that pays well. Roughly seventeen percent of individuals with student loan debt are delinquent on their payments, a higher delinquency rate than most other forms of debt. And, to top it off, bankruptcy does not allow borrowers to get rid of student loan debt, except under the most burdensome of circumstances.

What are the circumstances under which a borrower can have student loan debt discharged? In Chapter 7 or Chapter 13 bankruptcy, the court would have to find that repayment of the loans would impost "undue hardship" on the debtor and his or her dependents. This determination is made in an adversary proceeding in bankruptcy court at which creditors may be present to challenge the request.

The court uses a three-part test to determine hardship. One requirement is that, if forced to repay the loan, the debtor would not be able to maintain a minimal standard of living. Secondly, there must be evidence that the hardship will continue for a significant portion of the loan repayment period. Third, the debtor made good faith efforts to repay the loan before filing for bankruptcy. This typically means the debtor has been in repayment for at least five years.

All three of these requirements must be met for undue hardship to be found, and this is quite rare.

Source: Huffington Post, "Digging Deeper Into Student Loan Debt," Mike English, April 9, 2013

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