Student Loan Debt and Bankruptcy

Congress decided there was an abuse by students who would file for bankruptcy protection immediately after after graduation. The remedy this “problem,” Congress made student loans nondischargeable under 11 USC 523(a)(8). They reasoned that the “availability and solvency of educational loan programs for students outweighs the debtor’s need for a fresh start.” In re Merchant, 958 F2d 728.

The number of individuals with significant student loan debt has drastically increased over the years due to increased higher education costs and market factors.  Although it is extremely difficult to completely discharge your student loans in bankruptcy, there are a number of options to manage your loan obligations by filing a Chapter 13 bankruptcy.

Chapter 13 Bankruptcy Can Reduce Your Monthly Student Loan Payment

Student Loan Debt and BankruptcyThe benefit of filing a Chapter 13 bankruptcy is that you only have to pay what you can afford. If your monthly student loan payments are too high, you can enter into a Chapter 13 plan with lower monthly payments. Although you will still be required to pay your student loans back after your case is closed, filing a Chapter 13 can stop student loan collection efforts immediately and can delay or lower your monthly payments throughout the course of your plan.

Student Loans & In re Brunner

In re Brunner (46 BR 752) sets the standard for proving an undue hardship that prevents a debtor from paying back the student loans. A person filing for bankruptcy must show

  • (1) that the debtor cannot maintain even a minimum standard of living based on current income and expenses,
  • (2) that the undue hardship will probably continue for a significant amount of time, and
  • (3) that the debtor has made good faith efforts to repay the student loan debt.

The minimum standard of living test requires that the debtor show their income and expenses. The debtor then needs to show that paying back the loans keeps them below a minimum standard of living.

If the person trying to discharge student loan debt in bankruptcy can satisfy the first test, they must still show that their current situation is likely to persist for a very long time.

The last test is also facing different interpretations. “Good faith effort” is naturally pretty hard to define. Some courts are definitely more flexible than others when it comes to this test. Some courts have found that filing an undue hardship claim at the beginning of the bankruptcy case demonstrates a lack of good faith all by itself.

The bottom line is that you’d prefer not to find yourself having to meet this difficult standard. If it applies to you then you should definitely pursue it. But otherwise, there are probably better options available to you in order to help with your student loan debt.

Non-Bankruptcy Options

Our bankruptcy professionals have in-depth knowledge of the numerous repayment plans available  by the federal government. If you are concerned you cannot afford your monthly payment, we can guide you through the process of enrolling in a repayment plan more suited for you. Under these repayment plans, you can pay as little as 10% of your discretionary income if you qualify.

If your student loan obligations are becoming a hindrance on your financial well being, please schedule free initial consultation with an experienced Michigan Bankruptcy attorney at 248. 237.7979 to discuss your options.