There is a common misconception that filing for bankruptcy will not allow you to discharge your student loan debts. Discharge is not impossible, but it is very difficult. You must file a separate action, called an adversary proceeding, in which you argue that continuing to pay for your student loans would cause you undue hardship. If your case is successful, the court may partially or fully discharge your student debt. However, some courts have stricter definitions of undue hardship than others.
Most federal courts use the Brunner test to determine undue hardship. The court may decide that your student loan debt qualifies for discharge if:
- You would be unable to maintain a minimal standard of living while repaying the loans;
- Your financial circumstances are likely to remain consistent for the duration of the repayment period; and
- You tried to repay the loan before filing for bankruptcy.
Your financial statements can show how your student loan debt hampers your ability to pay for basic living expenses. You do not need to be at or below the poverty level to qualify for undue hardship.
Even if your income is low, a court can reject your undue hardship claim if it believes you are capable of obtaining a better-paying job. The court may review your education and experience and determine that you have not reached your full earning potential. However, you can present reasons why your current income level is unlikely to improve, including:
- Health problems that limit your ability to work;
- Being old enough that career advancement opportunities are less available; or
- Having a career in an industry with low or declining pay.
Licensed professionals in Texas with outstanding student debts can face another hurdle in reaching their earning potential. Texas law can prevent teachers, nurses and other professionals from renewing their professional licenses if they default on their student loan debts. The law is meant to discourage people from defaulting but may instead cause them to lose the jobs they need to pay off their debts. Texas lawmakers have said they are willing to re-examine and possibly change the law.
Student Loans and Bankruptcy
Whether through discharge or a repayment plan, bankruptcy can provide you relief from your student loans. The act of filing will halt collection efforts while you settle your case. However, your individual circumstances and the tendencies of the court will have a great bearing on whether you can discharge your student loan debt. One of the greatest benefits of a bankruptcy with respect to student loan debt is that relief from other unsecured debt could provide you with a sufficient cash flow to service your student loan debt. A Frisco, Texas, bankruptcy attorney at The Page Law Firm can discuss how filing for bankruptcy will affect your student loans. To schedule a free consultation, call 214-618-2101.