As an Asheville bankruptcy lawyer, I explain to people all the time that student loans are generally not dischargeable in a Chapter 7 or Chapter 13 bankruptcy case. However, if a client has an “undue hardship,” as defined by the BRUNNER test, they may be able to file an adversary proceeding within their bankruptcy case to get the student loan obligation discharged.
What are my chances of winning in bankruptcy under the Brunner test?
Probably not good. Under the Brunner test, a plaintiff must prove three basic things:
Lack of Income: Based upon your current income and expenses, you cannot maintain a minimal standard of living for yourself and your dependents if you are forced to repay your loans.
No changes in the future realistic. Your current financial situation is likely to continue for a significant part of the repayment period.
Repayment. You have made a good faith effort to repay your student loans.
Proving these three prongs is very difficult unless you have a massive debt with virtually no ability to ever hold a steady job and you have a consistent record of attempting to pay your student loans back over time.
Options Outside of Bankruptcy
There are good programs for federal student loans outside of bankruptcy.
Currently in Default
If your federal student loan payments are over 270 days behind, you are likely currently in default status. In order to be eligible for assistance, you need to either ‘consolidate’ or ‘rehabilitate’ your student loans. Consolidation is like a mortgage refinance, but banks do not take credit scores into consideration nearly as much as other types of loans because the debts are guaranteed by the federal government. You take out a loan which pays off the loan in default, and you are then eligible for assistance with the new loan which is not in default.
Not in Default Yet
If your federal student loan is not in default, you have the option of applying for several repayment plans which can significantly reduce your debt burden. The 10-year standard repayment plan is the default if you do not apply for a specific program. Frequently, the Income-Based Repayment Plan (IBR) offers significant savings from the 10-year standard plan.
Example: In a household of 4, with a $75,000 student loan debt, the estimated 10-year standard plan would require a payment of roughly $725 a month. With the same facts, and IBR payment for median-income clients would be roughly $213/month. Moreover, if you continue to make payments under the IBR program for 25 years, all principal balances are forgiven after the 25 years. You never have to pay it back.
Problems with student loans can be a sign of larger financial problems in a potential client’s household. If you are ready to figure out your options, I would be pleased to speak with you during a initial student loan consultation. The appointment costs $150 and includes a 30 minute telephone consultation and a detailed student loan analysis by email.
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