Discharging Student Loans in Bankruptcy
It is very unlikely that you will be able to discharge any part of your student loans in a bankruptcy case, either under chapter 7 or chapter 13.
The Bankruptcy Courts in Colorado (that is the 10th Circuit of the Federal District Court system) are bound by the “Brunner” test which gives every advantage to your student loan creditors and leaves you little room to argue.
The Brunner test is a 3 part test. First the court asks whether the debtor is able to maintain a minimal standard of living while paying the loans. Second the court looks at the debtor’s physical mental and emotional health and asks whether any disability that could prevent repayment is a condition which is likely to continue. Third the court will look at whether the Debtor has made a good faith effort to repay the loan.
In this context it is very difficult to proceed toward getting rid of these loans. The existence of income sensitive repayment programs is used against debtors when judges make these decisions. They reason that if you are able to pay on the loan, at all, you should not get out of it even if your payments do little to reduce the principal balance.
Recently (Jan 2016) the Supreme Court refused to decide a case brought by a lawyer who had $220,000 of student loans and was unable to find a job. In certain districts, the Court uses a “totality of the circumstances approach,” which can make it easier for debtors to get relief. Bankruptcy lawyers in Colorado were hopeful that the Supreme Court would take up the case and decide that the Brunner test should not be used.
Congress got us into this mess by authorizing student loan lenders to borrow from the government at 0% interest, lend that money to students at effective rates of 10% and promote the idea that everyone needs education to succeed in life. That may be true, but if we were to set out with the intent of causing costs to rise, we couldn’t have come up with a better system. When Congress realizes that student loans are crippling the economy and hurting the very businesses that are competing for citizen’s dollars. They will act.
In the meantime it is important to stay on top of your student loans, there are programs that can help reduce your payment and there is hope that the future may bring relief. You may be eligible for deferment. But defaulting is VERY expensive and will only add to your burdens long term. If you would like a consultation about student loans in the context of bankruptcy please call (303) 501-4028.