Student Loan Debt and Bankruptcy
Student loan lenders have lobbied for, and received, a lot of power from Congress and the legislators. This has resulted in these loans being essentially non-dischargeable in a bankruptcy context.
Presently, the controlling case on student loan dischargeability is In re Brunner, decided in the Southern District of New York in 1985. Here, a test was formulated that is still relied upon by most Federal Bankruptcy courts today.
The Brunner court ruled that a three-part showing is required to discharge student loan debt: 1) the debtor could not, based on current income and expenses, maintain a “minimal” standard of living for himself or herself and his or her dependents if forced to repay the loans, 2) this state of affairs was likely to persist for a significant portion of the repayment period of the student loan, and 3) the debtor had made good faith efforts to repay the loans.
All three elements of the above test must be met. This has been done in the Northern District of Ohio, but only a handful of times. The case of In re Lamento, prosecuted by a good friend and colleague of mine, is a good example of the type of fact pattern that can yield a student loan discharge. Feel free to google it.
Where does this leave most student loan borrowers facing bankruptcy? Streamlining your debts to where you have the available funds to make a $300-$500 student loan payment monthly is currently the function of Chapter 7 bankruptcy for most filers.
It should be mentioned that a bankruptcy discharge in a Chapter 13 or Chapter 7 case is not the only way to reduce or stop your student loan payment from being due. There is a medical discharge, that when signed off on by your doctor, can end your student loan debt. I can walk you through this.
Also, you can speak with your loan provider, and after submitting tax returns and pay records, you can qualify for an Income Based Repayment (IBR) that is drastically reduced monthly. This payment is formulated based on your ability to pay.