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Can student loan debt be discharged through bankruptcy?

Student loan debt is a hot issue in today's news, with some saying it has reached crisis levels. Many college graduates in Long Island needed to take tens of thousands of dollars out in student loans to fund their education, but they may find that upon graduation they were unable to find employment that paid enough to allow them to pay back their loans.

While there are many repayment plans available to help people pay back their loans, such as income contingent plans, sometimes a person finds that a catastrophic event has taken place that prevents them from paying back their loans. What can individuals do in such situations?

Although it used to be the case that student loans were not dischargeable through bankruptcy, according to some this may be slowly changing in very narrow circumstances. If a borrower wants to discharge his or her student loan debt through bankruptcy, it must be shown that paying back the loans would result in an "undue hardship."

Although there is no across-the-board definition of undue hardship, most courts use the "Brunner" test. There are three factors in the Brunner test that will be considered. First, the borrower must show that if forced to repay the loan it would not be possible to maintain a minimal standard of living. Second, it must be shown that the hardship would last for a significant part of the time period in which the loan must be repaid. Finally, it must be shown that the borrower has in good faith tried to pay back the loan.

According to some legal experts, most borrowers who successfully discharge their student loan debt have a permanent disability. A 2012 paper in the American Bankruptcy Law Journal reported that approximately 40 percent of borrowers who attempted to discharge their student loan debt through bankruptcy were able to do so. However only approximately 1 percent of borrowers who declared bankruptcy attempted to discharge their student loan debt.

As this shows, it is difficult but not necessarily impossible to discharge student loan debt through bankruptcy. If one wishes to attempt to do so, it may be wise to seek advice on how best to present their case, perhaps with the assistance of a bankruptcy law attorney, since the information in this post cannot serve as the basis for any legal action taken.

Source: U.S. News, "Discharge of Student Debt Possible During Bankruptcy," Farran Powell, April 27, 2016

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