Milwaukee, WI Bankruptcy Law Blog

Monday, July 17, 2017

Erasing Student Loans Through Bankruptcy

Should students be able to file for bankruptcy to erase student loan debt?

Student loan debt has reached crisis level.  Currently, the total U.S. student loan debt exceeds $1.3 trillion.  Students across the country are finding themselves unable to pay back there often massive student loans.  While other significant debts like mortgages and car payments can be discharged in bankruptcy, students are often dismayed to learn that student loans cannot usually be discharged in a Chapter 7 bankruptcy action.  Our Milwaukee bankruptcy lawyers discuss the challenges students face in erasing student loan debts and proposed legislation to change current bankruptcy laws concerning student loans.  

Student Loans and Bankruptcy Today

Usually, most debtors will not be able to discharge their student loan debt in a Chapter 7 or Chapter 13 bankruptcy.  However, one exception to this rule does exist.  If you can establish that it would be an undue hardship for you to repay your loans, you may be able to erase your debts.  Discharging your student loan debts is challenging and most courts are reluctant to grant a discharge without significant proof of hardship.

Some courts have adopted the Brunner test, in which you can discharge your student loans if you can show:

  • Poverty—you cannot maintain a minimal standard of living if forced to repay your loans;
  • Persistence—your current financial situation is likely to continue; and
  • Good faith—you have made good faith efforts to repay your student loans.

Other courts look to the totality of circumstances surrounding your debt and financial situation.  Regardless of which test your court adopts, obtaining a discharge of your student loans will be an uphill battle.  

The Discharge Student Loans in Bankruptcy Act

Recognizing the immense hardships that many students face in paying back their loans, Rep. John Delaney of Maryland has introduced the Discharge Student Loans in Bankruptcy Act for the past three sessions of Congress.  The bill would allow all student loans to be discharged if bankruptcy is declared.  Students would still need to meet bankruptcy laws that govern all other types of debt.  Delaney has vowed to continue to push for passage of his proposed law.  It will be referred to the House Subcommittee on Regulatory Reform and time will tell whether it gains the momentum it needs to become law.

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