Your Bankruptcy Options When You Have Student Loan Arrearages

May 30, 2019 By: Carrie Weir

Can You Get Student Loan Payments under Control through Bankruptcy?

You borrowed a lot of money to get through college, with the hope that you’d have a well-paying job that allowed you to quickly repay those loans, only to find it difficult to either find a job or get one that pays you what you need. Unfortunately, you’re not alone. Studies show that nearly 70% of college students borrowed an average of nearly $30,000. Currently, about 45 million borrowers owe $1.5 trillion in student loan debt.

If you’ve struggled for some time to meet your financial obligations, you may have contemplated a bankruptcy filing as a way to get out from under your student loan obligations.

The General Rule

Unfortunately, in most instances, you can’t discharge student loan debt in a Chapter 7 bankruptcy proceeding. You can, however, reorganize or restructure student loan debt through a Chapter 13 filing. In such a proceeding, your student loan debt will be treated as non-priority unsecured debt, similar to medical bills or credit card obligations. Accordingly, when you put together your reorganization plan, your student loan creditors will be required to accept a pro-rata share of the amount you are able to pay all creditors. When the Chapter 13 bankruptcy period is over (typically 3 to 5 years), though, you will still owe any remaining balance on your student loans. During the period of the Chapter 13 bankruptcy, though, you may be able to delay or reduce student loan payments, and you won’t have to worry about collection attempts.

Seeking a Hardship Exception

There is one exception to the general rule–if you can show that you would incur an undue hardship if you have to pay your student loans, you may be able to have some or all of them discharged in a Chapter 7 proceeding. Most courts follow the Brunner test, a ruling in federal court in New York. The court in Brunner ruled that student loan payments may be discharged in bankruptcy if the debtor can show that

• He or she could not maintain a minimal standard of living for self and dependents if forced to make student loan payments
• That the current financial condition is likely to continue for most of the repayment period, and
• That a good faith effort has been made to repay the student loans.

Other courts will look at the totality of the circumstances, and may discharge student loan payments if they find undue hardship. The reality, though, is that most federal bankruptcy courts take a conservative approach and discharge of student loan debt is extremely rare.

Contact Heath, TX Bankruptcy Attorney Carrie Weir

At the Law Office of Carrie L. Weir, I provide a free initial consultation to anyone with questions or concerns regarding a personal bankruptcy filing. Contact my office by e-mail or call me at 972-772-3083 to schedule a private consultation. With offices in Rockwall, Texas, I represent clients in Heath, Greenville, Lavon, Wylie, Mesquite and Rowlett.