You Can Get Student Loans Forgiven in Bankruptcy, but It’s Far From Easy
As this article cites, two different studies have shown that it is possible to find relief from a large student loan burden but it is not a given. Like with many issues considered in personal bankruptcy the best first course of action is to sit down with a Bankruptcy Attorney and discuss the debt and your specific circumstances.
Conventional wisdom once held that it was almost impossible for debtors to get off the hook for student loans, even after they declared bankruptcy. That thinking was challenged by a 2012 paper in the American Bankruptcy Law Journal that showed that a high percentage of those who sought a release from their student debt were successful. A decision handed down last month in U.S. District Court in Alabama shows that success rates aside, the standards for winning a discharge (legalese for having your loan obligation canceled) are plenty high.
In the Alabama case (subscription required), the U.S. Department of Education sought to overturn a bankruptcy court’s decision to discharge $82,000 in student loans made to a former Auburn University sociology major currently working in business development at a staffing company. In its appeal, the government argued that the lower court erred in determining that the debtor met the standard of “undue hardship” needed to discharge student loans.
For the most part, bankruptcy courts have adopted something called the Brunner test for such cases, requiring a debtor to meet three requirements: The student loans must prevent her from maintaining a “minimal” standard of living, she needs to demonstrate a good-faith effort to maximize income and limit expenses, and she must show that her hardship is likely to continue for a “significant portion of the repayment period.”