Discharging Student Loans in Chapter 7 Bankruptcy

Contrary to popular belief, student loans can be discharged in bankruptcy in certain circumstances. While most borrowers would prefer to be able to repay their debts, sometimes their financial situation requires another approach. One way to eliminate student loans is to file a Chapter 7 bankruptcy and show a hardship. Under the bankruptcy rules, hardship is difficult to prove, but not impossible. The Brunner Test must be applied. Under the Brunner Test, the debtor must prove three things. The first two are not that difficult. The debtor must show an effort was made to pay in the past. The debtor must also show there is no ability to pay at present. Under the third prong of the test, the debtor must show he or she will not be able to pay in the future. For example, if you are permanantly disabled, you would have a very good chance of being able to discharge the debt.

Some borrowers have been able to reduce student loans by arguing that some of the money was not used for tuition, fees and indirect costs relating to the enrollment. Age can also be used as a factor. For example, someone retired on Social Security may have no realistic chance of repaying the debt. Even if you cannot eliminate the loans, bankruptcy can provide other benefits. By eliminating other debt, paying the student loan is easier. In addition, Chapter 13 can be used to get relief from the full payment, at least while in chapter 13, which can be up to 5 years. Consulting with a bankruptcy professinal is recommended.

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