What to know about student loans and bankruptcy

On Behalf of | Oct 30, 2021 | Bankruptcy |

When consumers in New Jersey see no way out of debt, bankruptcy allows them to discharge certain unsecured debt. However, not all unsecured debts qualify for discharge, such as domestic obligations. It is commonly believed that student debt cannot get discharged, but it can be relieved in certain situations.

Student loans in bankruptcy

Consumers commonly choose to file Chapter 7 bankruptcy, which requires the selling of nonexempt assets to pay creditors. While most debts are automatically discharged in four to six months, student loans require an extra step. The debtor must file an adversary proceeding, or a separate lawsuit within a case against the lender, to get the loan considered for discharge.

If a debtor doesn’t qualify for Chapter 7 or they want to pay some of the debt, Chapter 13 bankruptcy helps them remove debt through a payment plan. They aren’t required to sell assets under Chapter 13 as long as they stay current on payments. The student loan gets figured into the payment plan, and they have three to five years to complete it.

How courts determine whether to discharge student debt

Student loans may be discharged if there is simply no way to pay them. The Brunner test determines eligibility to get student loans discharged based on several factors that include the following:

  • Paying the loan would create an undue hardship.
  • The debtor made a good-faith effort to pay the debt before filing bankruptcy.
  • They don’t see an improvement in their financial situation any time soon.

Some courts may apply the totality of circumstance standard, which works similar to the Brunner test but with fewer restrictions. For example, the court may consider the filer’s resources and the reasons they don’t have a job in their field.

The debtor may get all of the debt, none of the debt or part of the debt discharged based on the court’s decision. However, a lender can reject the motion to dismiss if they feel that the debtor doesn’t have an undue hardship.

There is no single way to ensure that bankruptcy discharges student loans, and it is tricky but not impossible to get them dismissed. If it doesn’t work, forbearance, consolidation and public loan forgiveness programs are available.