Many Americans struggle with student debt and in some cases, complete repayment seems impossible. Even though bankruptcy laws treat student debt differently from other debt you can discharge student loans. The condition for this is to prove that repayment would cause you and your dependents an "undue hardship". The Bankruptcy Code doesn't define what is undue hardship, this is determined by bankruptcy courts by applying a test. And sometimes it is challenging to prove but it is not impossible.
Filing for bankruptcy
If you can successfully prove undue hardship, your student loan will be completely canceled. Filing for bankruptcy also automatically protects you from collection actions on all of your debts, at least until the bankruptcy case is resolved. Or until the creditor gets permission from the court to start collecting again.
The most common tests used are the Brunner test and the totality-of-the-circumstances test, both are very subjective.
The Brunner test asks 3 questions
- Based on your current income, can you maintain a minimal standard of living for you and your dependents while repaying your student loan debt?
- Is your financial situation likely to stay the same for a significant portion of the repayment period of the student loans?
- Have you made a good faith effort to repay your student loans?
On the other side, the totality of the circumstances test refers to a method of analysis where decisions are based on all available information rather than bright-line rules. Under said test, courts focus "on all the circumstances of a particular case, rather than any one factor".
The department of Education offers repayment plans based on your income, so it becomes more difficult to prove you can't maintain a minimal standard of living while paying your loans. Private student loans, on the other hand, typically don't offer affordable monthly payments based on income. Because of that, it becomes easier to get an undue hardship discharge of your private student loan debt or maybe a partial discharge.
Other Alternatives
If you're having trouble paying the total amount of your debt, consider refinancing your student loans with an ISA. So, instead of having to pay a loan with accumulating interest, you'll be paying a percentage of your income towards a set number of payments for a set period. This will help you get rid of your debt, and most importantly set you free from the burden you're going through. To understand ISAs a bit more, read The Difference Between Loans and Income Share Agreement, or you can directly reach out to us!
