Does Chapter 7 bankruptcy cover student loans?

Student loans have been a very controversial topic in the last couple of years. Because of the ongoing pandemic, the situation for student loan repayment has changed. Federally held student loans are not required to be paid back right now, and interest on student loans has been halted until May of 2022. Regardless, you may have some unresolved student debt that is haunting your life, even through these governmental protections. 

Student loans are a murky territory when it comes to bankruptcies. Thankfully, there are experienced Florida bankruptcy attorneys who have decades of experience helping people like you return peace of mind and move forward, away from their debt responsibly. 

Student Loans Are Not Automatically Covered

Is student loan debt dischargeable by a Chapter 7 bankruptcy? Or any bankruptcy for that matter? 

Well, the answer is so far in the gray area. Common knowledge and information on bankruptcy typically states that student loans are not eligible for discharge under Chapter 7 bankruptcy or any other form. However, it is possible for federal student loans and other forms of student loans to be discharged if you can prove undue hardship.

Despite the possibility, less than 0.1% of those filing a Chapter 7 bankruptcy have even tried to discharge their student loans. It is widely accepted as near impossible, but according to a popularly referenced study from 2011, upwards of 40% of people who initiated an adversary proceeding had at least part of their student loan debt forgiven. 

Student loan debt is not immediately discharged under a Chapter 7 bankruptcy. The petitioner must file their Chapter 7 petition, and then file an additional complaint to determine if their debt is dismissible, which then initiates the previously mentioned adversary proceeding

Student loan debt qualifies for discharge under a Chapter 7 bankruptcy filing, only if it can be proved that the continuation of payment will cause the debtor an undue hardship. This means that if your only debt is from your student loans, this process may not benefit your situation. If you’ve already filed a Chapter 7 and never filed an additional complaint to have your student loan assessed for discharge, you can reopen your case at any time!  

Proving Undue Hardship

Undue hardship is generally described as the inability to meet a minimal standard of living for themselves and any dependents. It is the duty of the debtor and their accompanying lawyer to prove this using substantial and clear evidence to the bankruptcy court. 

To help prove hardship, keep a record of all payments, accrued interest, and notices that you have regarding your loans, as they are the first line of resources to use when proving hardship. Depending on your unique circumstance, other records may apply. Remember, all you’re proving is that this debt is causing you hardship, so any documents that you have to prove will help. The court has its own way of testing your ability to pay back your student loan debt, by using one of two similar tests.

The Brunner Test vs. The Totality Of Circumstances Test

Each district of bankruptcy court uses its own hardship test. The most common are The Brunner and Totality of Circumstances tests. 

The Brunner Test asks three things:

  1. Will paying back this debt leave you unable to maintain a minimal standard of life?
  2. Is your financial situation likely to change anytime soon?
  3. Have you made an effort to pay back this debt? 

The Totality of Circumstances test also takes 3 things into consideration: 

  1. Your past, present, and any certain future financial resources
  2. Reasonably necessary living expenses (this ranges based on where in the state you live)
  3. Any other relevant facts to your unique situation that have been brought to the attention of the court. 

These tests are used to prove that a debtor is living in a condition that makes it impossible to fulfill basic financial responsibilities and that they cannot handle the added responsibility of student debt. 

Examples Of Undue Hardship

  • Unfulfilling or Fraudulent Education: Many courts have discharged debt when the debtor did not benefit from their higher education or went to a fraudulent college that took advantage of their finances. 
  • Low-Paying Yet Rewarding Career: A married couple was able to prove undue hardship even while they both worked full-time jobs. They were both teachers, and one taught emotionally disturbed children. When evaluated, it was found that despite their income technically being above the expected low threshold, the couple had $400 more in monthly expenses than they brought home in income. The court was sympathetic to their situation, as they both work for their community and provide for a family, but are haunted by decades-old debt. Not all courts will be this generous, but it is important to see how courts genuinely look at bankruptcy cases on a humane level. 
  • Mental Impairment & Future Circumstances: A woman was able to discharge her student loan debt after proving that she had a mental illness that inhibited her from going to work anymore. She brought forth evidence of social security benefits and her diagnosis/treatment. The court concluded that this illness would likely continue to interfere with her ability to work. 

In 2014, a court determined a “minimal standard of living,” as somewhere between poverty and “mere difficulty.” This means that you do not have to be under the poverty line to prove undue hardship, just that the payments are stopping you from providing a healthy existence to any dependents and yourself.  

Facing Opposition By The Loan Holder

While the court does have the determining voice in your case, the loan holder will have a loud say in the proceedings. There is a 2015 letter written by the Department of Education expressing how the holder must also evaluate the debtor’s hardship claim and determine if they believe that repayment would constitute an undue hardship. If they come to a separate conclusion, they are allowed to make their case and oppose your debt discharge. 

Talk With An Experienced Bankruptcy Attorney Today!

If you have any questions about your student loan debt, and what bankruptcy can do for you, there is an experienced member of our team waiting to speak with you! 

The lawyers at Hoskins, Turco, Lloyd & Lloyd have been in the business for over 35 years, and we are ready to take on your case and start your bankruptcy petition. You’ll have a no-obligation, completely free case review before any work gets started so that you can ask as many questions as you need and get familiar with the idea of a bankruptcy case.

Call us today at 866-460-1990 or contact us online to schedule your consultation and get your financial situation back on the right track!

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