Student Loan Debt
The purpose of bankruptcy is to relieve the burden of debt. What if that debt is student loans? Can student loans be discharged in a bankruptcy? The short answer is yes, however, it is a difficult process which will require an adversary lawsuit.
An adversary lawsuit is a separate proceeding within your bankruptcy, where you would sue your student loan provider to attempt to have the debt deemed dischargeable. Generally, adversary proceedings are not included in the cost of a bankruptcy case.
In order to have student loans discharged in bankruptcy, you must prove the repayment of the debt will impose an undue hardship on you and your dependents. Different courts use different guidelines, or tests, to determine what constitutes undue hardship.
The Eighth Circuit Court of Appeals, which covers the State of Missouri, uses the "totality of the circumstances" test to determine whether a student loan debt should be discharged based on undue hardship. The burden of proving undue hardship is on the debtor.
This means it is up to you and your bankruptcy attorney to prove the student loan debts are causing undue hardship. The Debtor must provide supporting evidence of this hardship.
The bankruptcy court will evaluate the evidence provided and consider:
- The debtor’s past, present, and reasonably reliable future financial resources.
- A calculation of the debtor’s and debtor’s dependent’s necessary living expenses.
- Any other relevant facts or circumstances of each individual bankruptcy case.
Some of the factors used to in evaluating a debtor’s circumstances include:
- Total present and future incapacity to pay for reasons not within the control of the debtor. Essentially, can you pay now, or will you ever have the capacity to pay for reasons out of your control?
- Has the debtor made a good faith effort to negotiate a deferment or forbearance?
- Will this hardship be long term?
- Has the debtor made payments on the student loans?
- Is there a permanent or long-term disability that is preventing you from paying on the student loan debt?
- Does the debtor have the ability to obtain gainful employment in the field of study?
- Have you made a good faith effort to maximize income and minimize your expenses to allow for repayment of the student loans?
- Was the dominant purpose of the bankruptcy filing to discharge the student loans?
- The ratio of student loan debt to total indebtedness.
All things considered, the burden of proof is a heavy one for the debtor and will require the assistance of a knowledgeable bankruptcy attorney who fully understands the obstacles involved in discharging student loan debts in Missouri.
Simply put, if the debtor’s reasonable future income or earning potential will allow for a payment of the student loan debt while still allowing for a minimal standard of living then the debt will not be discharged. You will certainly want the honest opinion of an experienced bankruptcy lawyer.
What will happen to your student loans if you file bankruptcy? In most cases the student loans are not discharged in bankruptcy. If you file a Chapter 7 bankruptcy you will still owe the student loan debt after the bankruptcy case is discharged and closed.
When filing a Chapter 13 bankruptcy, there are a few options. The debts will still not discharge in the Chapter 13 but you may be able to reduce the payments temporarily, stop the student loan payments temporarily, or even pay the student loans through your Chapter 13 repayment plan.
An attorney with expertise in structuring a Chapter 13 plan can determine the best way to handle your student loan debt in a Chapter 13 bankruptcy in Springfield Missouri.