Student Loans and Bankruptcy
A college education has long been considered the cornerstone of success. We are told throughout our lives that we need a degree, or more than one degree, to get access to prosperity.
However, for many Americans, the cost of an education has become too high. Many have been unable to afford a college education without the assistance of substantial student loans. As a result, student loan balances are increasing faster than any other category of debt, outstripping consumer spending, medical debt and other areas.
By end of 2015, the combined outstanding student loan balance reached $1.2 trillion. On average, individuals owed an average of $26,000.
Between 2004 and 2014, the number of borrowers increased by 89%. The average debt increased by 77%.
Borrowers who still have debt are, on average, getting older. Two-thirds of people who have student loan debt are over the age of 30.
A number of individuals have difficulty finding a job after graduation, especially one with adequate pay to cover high student loan payments. Because of this, some borrowers find that their loans are an undue burden and seek relief.
Can Student Loans Be Discharged in Bankruptcy?
The commonly held belief is that student loans are not dischargeable in bankruptcy. Period. However, this is one of those areas where the common belief can be wrong in certain situations. Contact Bunch & Brock to discuss your specific case.
Before 1976, all individuals could include student loans in bankruptcy proceedings. However, because of concerns with high default rates, Congress began passing laws that would ban federal student loans from bankruptcy discharges. The first law said that a student loan could not be discharged in the first five years. The ban was then extended to seven years. In 1998, the law was changed again to remove all timeframes and declare that student loans could be discharged only in cases of undue hardship.
However, even under these harsher requirements, some student loans have been included in the debt that can be discharged in a bankruptcy.
Since most people do not believe that student loans are dischargeable, few people try. A report in the American Bankruptcy Law Journal on student loan discharges says that only .1% of people who file for bankruptcy with student loans try to include them in their bankruptcy proceedings.
However, when people do attempt to include their student loans in bankruptcy, they sometimes prevail and are allowed to have at least some of their debt discharged. The American Bankruptcy Law Journal study found that 40% of people who attempted to include their student loans in their bankruptcies had some or all of their debt discharged.
The key is that continuing to pay the debt would be an undue hardship. Courts in Kentucky use what is known as The Brunner Test to determine whether a debt exerts undue hardship. This is a three-part test used to evaluate whether a student loan debtor can continue to pay off a debt:
- Has the borrower made a good faith effort to repay the student loans?
- Will the borrower be unable, based on his or her current income and expenses, to maintain a minimal standard of living for himself or herself and any dependents if forced to repay the loans?
- Are there additional circumstances that exist that indicate that this state of affairs is likely to persist for a significant portion of the repayment period for the student loans?
- Additionally, only student loan funds that were used for the cost of attendance, as defined by the Higher Education Act, can be discharged in bankruptcy. These costs include tuition, books and indirect costs that are related to your enrollment.
Although it can be difficult to prove undue hardship, it is not impossible. If you believe that your student loan debt and your attempts to repay it fulfill the requirements above, we may be able to help you get some or all of your debt discharged in bankruptcy.
At Bunch & Brock, our Kentucky student loan debt attorneys have extensive experience with every aspect of creditor issues and debt. We understand the hardships that many individuals face when they have debts that they are unable to repay.
While it is often not possible to have all of student loan debt discharged in bankruptcy, we can also help you explore other options that include negotiating with the lender to get more favorable terms. We are dedicated to getting the best possible outcomes for our clients to relieve them of financial troubles.
If you have questions about your student loan debt, consult the experienced Lexington, KY bankruptcy lawyers at Bunch & Brock. We have guided many people through the bankruptcy process efficiently and effectively. Let us put our knowledge and experience to work for you to make the best plan for eliminating or repaying your debts. We encourage you to contact our office by calling 859-254-5522 or filling out this online form.