Consumers overwhelmed with debt in East Orange, New Jersey, may file for bankruptcy, a legal procedure to remove certain debts. There is a misconception that student loans cannot get discharged in bankruptcy. However, it is possible to get student debt discharged depending on the circumstance.
Student loans in bankruptcy
Since there is no bankruptcy for a single debt, debtors must submit a petition listing unsecured and secured debts. Student loans are commonly an unsecured debt, because they have no collateral attached to them.
Chapter 7 removes certain unsecured debts through a liquidation process to remove unsecured debts. However, not all unsecured debts can get removed, such as domestic obligations, restitution, and current taxes.
Chapter 13 simplifies the debts into one monthly payment according to income, but the debtor keeps assets. The debtor can include student loans as part of the repayment plan overseen by a trustee. To discharge student loans in either bankruptcy type, the debtor must file an adversary proceeding.
Requirements for getting student loans discharged
Many states apply the Brunner test to determine qualifications for dismissing student loan debt. The requirements for debtors include:
- making a good-faith effort to repay the loan
- proving they will fall below the minimal living standard if forced to repay
- they do not see any improvement in the near future
Sometimes, courts may apply the totality of circumstance, which works like the Brunner test. The difference is the court looks for relevant facts and evidence the consumer could not make good faith payments because of hardship. It is commonly easier to get private loans discharged under these tests over federal, since federal is often income based.
If the debtor passes the tests, they will partially pay the debt or get it all dismissed. Debtors who fail the tests could use certain defenses, such as deception or unfair practices, to discharge the loan.