Bankruptcy and Student Loan Debt
Not only does education create career opportunities, it can also foster financial gain. But when are the costs of reaching your educational goals too much? And what happens if you cannot pay your school bills?
Most Americans attending college or university receive student loans to pay their way through school. These loans can be obtained through the federal government or private lenders, but different regulations govern each type of loan. While federal loans have specific limits on factors such as interest rates, there are no such limits in place for private loans. This can cause financial difficulties for those responsible for these loans.
In 2016, the average student in the United States owed a staggering $37,172 in student loan debt. More than 44 million students borrow a collective $1.5 trillion in student loan debt to advance through university programs and graduate schools. This student loan debt can have long-lasting consequences that could set young adults up for a lifetime of financial hardships. Significant student loans can make it difficult to buy a house and raise a family. Even worse, when emergencies arise, such as unexpected car repairs, medical bills, or job uncertainties, large student loan debt can make it virtually impossible to get back on your feet.
If you are struggling with crushing student loan debt, it is important to understand how bankruptcy could affect you. An experienced bankruptcy lawyer at Rainwater, Holt & Sexton can answer your questions and help you choose the option that is best for you. While bankruptcy is not for everyone, it can be a good solution that offers families a second chance to get back on their feet and out from the weight of debt.
Can Student Loans Be Discharged in Bankruptcy?
Student loan debt cannot be discharged through bankruptcy easily. However, it can be done. In Chapter 7 and Chapter 13 bankruptcy, student loan debt is considered unsecured and can’t be discharged. In order to discharge student loan debt, you prove undue hardship. Undue hardship means that you must show that repaying this debt would cause undue hardship on you and your family. For individuals and families with hundreds of thousands of dollars in student loan debt, finding relief isn’t easy.
For example, an article from CNN Money told the story of a father of a young woman who died. He was left liable for covering $100,000 in private student loans that he had co-signed for his daughter. Unable to make the payments, interest rates swelled the total owed to more than $200,000. This is an example of undue hardship.
Individuals that are able to prove undue hardship can have their student loans completely canceled.
What is Undue Hardship?
Undue hardship means that you must show that repaying debt would cause undue hardship on you and your family. When repaying student loans puts your family in significant financial hardships, you may be eligible to have your student loan discharged. Courts use different tests to evaluate whether or not you truly have an undue hardship. Two of the most common tests include the Brunner Test and the Totality of Circumstances Test.
- Brunner Test – this is the most common of all the undue hardship tests and it requires the debtor to show that they cannot maintain a “minimal standard of living” if they are forced to repay their student loan debts. They must also show that they will be unable to maintain a minimal standard of living for a significant portion of the repayment period and that they’ve made a good faith effort to repay their loan.
- Totality of Circumstances Test – some courts just look at the overall circumstances of your life before they decide if you would suffer undue hardship if you had to repay all of your student loans. Other factors are often considered in this situation and you may not need to prove all the factors of the Brunner Test.
Evidence Needed to Support Undue Hardship
The court will often request to see specific documentation that paying off your student loans will cause undue hardship. Some of the evidence you and your lawyer will need to gather include:
- Tax returns
- W2 forms
- Bank statements
- Credit card statements
- Monthly bills
- Mortgages or Rent
- Medical records if you have a disability
- Job loss documentation
- Dependent status
- Documentation that you attempted to repay your debt
- Amount of student loans
We’re There When You Need Us
The bankruptcy process is often difficult, frustrating, and overwhelming. Dealing with creditors isn’t easy and student loan debt can be nearly impossible to discharge through bankruptcy. Without a lawyer on your side, you may not obtain the relief you need. In fact, only about 0.1% of bankruptcy filers with student loan debt have their student loans discharged due to undue hardship. Yet, judges actually approve 40% of the debtors who seek ask for undue hardship. That’s why it is imperative to talk to an experienced bankruptcy attorney in Arkansas immediately. We can help you file for undue hardship and significantly improve your chances of having your student loan debt discharged forever.
If you’re considering bankruptcy in Arkansas, or you simply want to learn more about your options, we can help. With four offices in Arkansas—Little Rock, Fayetteville, Conway, and Hot Springs—our Arkansas bankruptcy lawyers are here to help you weather the storm. Fill out a free contact request form or call (800) 767-4815 so we can get to work for you.