Over the years, thousands of Americans have accrued several hundreds of thousands of dollars in student loan debts. Many people take student loans with the mindset to pay them back after graduation but life happens and due to some reasons may be unable to fulfill their end of the bargain. With growing interest rates, student loans may become a monster that may be hard to tame. When dealing with such a problem like this, bankruptcies in Hyannis may be the next line of action. However, the major question is whether student loans can be forgiven in bankruptcy.
Understanding Bankruptcy And Student Loans
Many people believe that student loans and bankruptcy do not mix. This may be right to an extent but for the most part, it depends on certain factors and exceptions. When filing bankruptcy, you have one of two options to choose from, either chapter 7 or chapter 13 bankruptcy. Chapter 7 bankruptcy focuses on a complete discharge of the debt owed by the borrower. However, for this to work, the borrower must be able to prove that they are unable to pay back what is owed due to low or no income. They also have to prove their inability to meet certain basic living costs and requirements.
Chapter 13 bankruptcy, on the other hand, is a lot more different. For this bankruptcy filing, the borrower seeks a period of three to five years to repay the amount owed. As part of this bankruptcy filing, a part of the borrower’s debt can be discharged but they will be required to pay up some of the amount owed. This bankruptcy filing is designed for people who have a source of income and a little extra left after catering to their basic living expenses.
Persons who file for chapter 7 bankruptcy may be able to get their student loans discharged, however, those who file for chapter 13 bankruptcy are not eligible for student loan discharge.
Can Bankruptcy Be Filed On Student Loans?
Student loans fall under the non-dischargeable debt category. However, the bankruptcy law has an exemption that allows student loans to be forgiven if they can be proven to exert or impose an undue hardship on the borrower and/or their dependents. The tricky part is that the bankruptcy law does not define, in legal terms, what undue hardship is. The judge sitting over this matter is responsible for deciding whether the applicant or petitioner is undergoing undue hardship as a result of the student loan debt or not.
In most cases, people who are seeking student loan forgiveness will be required to show to the court that they are undergoing hardship that is greater than that of others who have also filed for bankruptcy. To determine whether an applicant is undergoing undue hardship, various courts use different tests including the Brunner test and the Totality of Circumstance Test. For the Brunner Test, the applicant will be required to meet the following criteria;
- Inability to meet the minimal standard of living based on the current income and expenses.
- Low chances of financial improvement in the coming years to help in offsetting the loan
- The applicant has made an effort, in good faith, to repay the student loans.
The Totality of Circumstance test requires that “all relevant factors” must be met before the petitioner is considered for a student loan discharge.