Student Loans and Bankruptcy

This one hit a little close to home for me, given as I’m still enrolled in college and all, but I thought it worth mentioning.

Anatomy-of-a-defaulted-student-loan-SALT-infographic13

I’ve had some friends who have filed for bankruptcy – a sad reality at our age, but it’s something a lot of people face and will continue to at any given point in their lives. Maybe their spending got too out of control, maybe they were saddled with debt because of bad relationships. Whatever the reason, I try not to judge.

But it has recently come to my attention that not all debts are considered equal in bankruptcy proceedings. The first things to be discharged are the major ones like credit card debt, maybe vehicle financing, things like that.

You might be shocked and dismayed (if you’re in circumstances not unlike mine) to learn, however, that while student loans might be discharged under bankruptcy, there is a very high bar to have it considered.

For considering the discharge of student loans under bankruptcy proceedings, a standard of measurements knows as the Brunner Test is employed:

-The plaintiff must be able to prove that they cannot afford a minimum standard of living for themselves and their dependents if forced to continue repaying the loans
-Additional circumstances must exist to prove that the plaintiff’s current state of financial hardship is likely to continue for some time
-And lastly (perhaps most importantly), it must be shown that a good faith effort was made to pay the loans back

If these criteria are not met – sorry to say, you’re still likely to be saddled with student debt even through Chapter 7 bankruptcy proceedings.

A recent court case found a student named Warner who had filed for Chapter 7 and was working as a clinical psychologist was not able to repay his loans solely on failing that third criteria. While the circumstances preventing his repayment were proven to exist for the time being and may proceed into the future, it was shown he had not made a good faith effort to attempt repayment – all but about $400 of the payments that had been made to this point were done by his mother, and it was shown he had not used any of the nearly $6000 he had collected in tax refunds in the year 2013 to make loan payments.

This all came together to show he had not previously made a good faith effort to repay his loans, and they were not found dischargeable.

Just goes to show everyone, even in bankruptcy you’re likely to be stuck with your loans.

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Student Loans and Bankruptcy

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