Can You Declare Bankruptcy From Student Loans?

Student loan debtors are very nervous about their new higher loan payments. If they cannot get “income-based repayment” — for whatever reason– the new payments may be economically back-breaking.

I have had borrowers ask me if they could declare bankruptcy. Until a couple of years ago, my answer was that they would probably fail. In many cases, the Government would actually send in its own attorneys right away to challenge you.

However, there has been a small improvement. 

Courts are now open to consider three situations that could produce a successful student loan bankruptcy. This is called the Brunner test….and  if all the Brunner conditions are clearly met, government attorneys may not even contest the case.

Here are the three qualifying conditions:

1. You cannot maintain a minimal standard of living for yourself and your family if forced to repay your loans.  You cannot provide the basics like rent, food, utilities, and car expenses. The court will review your income and expenses for verification.
2. Your current financial situation is unlikely to change during the repayment period — including   retirement age, disability or chronic injury, or protracted unemployment history. 
3. You can demonstrate you made a good-faith effort to repay your loans..  DOJ will consider, for example, whether the debtor contacted DOE or their loan servicer regarding payment options for their loan, such as income-driven repayment plans

 If you are 50 or older, likely to remain poor for the rest of your life, and tried hard to pay off your loans, you might be a candidate for student loan discharge.