Approximately one third of Millennials live with their parents. Student loan debt is part of that reality, often making it impossible for young adults to afford basic necessities such as rent. Parents who are in a financial position to help their adult children often do so. What about those students who are on their own after graduation and are faced with student loan payments that exhaust much of their income, leaving them with insufficient funds to pay their living expenses? Is there any way out from under crippling student loan debt?
Can You File Chapter 7 Bankruptcy on Student Loans?
When filing a Chapter 7 Bankruptcy petition, a debtor can include student loans in the debts to be discharged by the bankruptcy court if the debtor can show that repayment would create undue hardship. Discharging a debt means the debtor is no longer responsible to pay the debt, and the creditor is prevented from pursuing collection. A debtor must file a separate adversary proceeding to request that the bankruptcy court discharge student loan debt.
In the adversary proceeding to discharge student loan debt, first the lender or creditor must prove the existence of the debt and that it is owed by the debtor. If the lender provides such proof, then the debtor must prove that repayment of the balance of the student loan would cause undue hardship.
Some courts use the Brunner test to determine whether the debtor has proven undue hardship and is entitled to discharge of the student loan debt. Using the Brunner standard, the courts assess whether the debtor has shown that:
- the debtor cannot maintain a minimal standard of living if forced to repay the loans;
- the debtor’s current situation is likely to persist for a significant portion of the repayment period of the student loans; and
- the debtor has made good faith efforts to repay the loans.
Other courts have rejected the Brunner test and use a “totality of the circumstances” test in the undue hardship analysis. Courts using the totality of the circumstances look at several factors, including the debtor’s financial resources and living expenses as well as other relevant circumstances, to determine whether repayment would cause undue hardship. Sometimes, courts use a hybrid test, including criteria from both the Brunner test and the totality of the circumstances test.
Meeting the undue hardship standard in a Chapter 7 bankruptcy can be difficult.
How Much Do You Have to Be in Debt to File Chapter 7?
A debtor filing a Chapter 7 bankruptcy petition must show financial difficulty and an inability to pay existing debts. If the debtor’s monthly income, after deducting certain priority debts and necessary living expenses, exceeds the median income in the debtor’s state, a means test is used to analyze whether the debtor’s Chapter 7 filing can proceed.
Under the means test, the debtor’s income and debts are analyzed to determine whether the debtor, after paying necessary living expenses, can pay the lesser of 25 percent of his non-priority, unsecured debt (of at least $7,700), or $12,850. Non-priority, unsecured debts are debts not secured by collateral such as a car or a home, and that are not classified as priority debts (such as child support or taxes). Non-priority, unsecured debt includes credit card debt, medical bills, personal loans and student loans.
If the debtor cannot meet the means test, a presumption of abuse of the Bankruptcy Code applies. The debtor’s petition for Chapter 7 bankruptcy would then likely be dismissed or converted to a Chapter 13 filing (which involves restructuring debt and creating a payment plan). The debtor may rebut the presumption of abuse by showing special circumstances that would lower available income or increase expenses, allowing his case to move forward.
If the debtor meets the means test, the Chapter 7 bankruptcy case can proceed. The debtor would still need to show undue hardship in an adversary proceeding to have student loan debt discharged.
How do You Get Your Student Loans Forgiven?
- Public Service Loan Forgiveness – After making 120 monthly payments while working for a qualifying employer, the remaining balance under your Direct Loans is forgiven. (Note: The Consolidated Appropriations Act, 2018 changed this program and the new statutory conditions are being assessed by the Department of Education_._)
- Teacher Loan Forgiveness – After teaching full-time for five years in a qualifying low-income school, the borrower may be eligible for forgiveness of part of the student loan balance.
- Total and Permanent Disability Discharge – This program provides relief from repayment of certain student loans based on total and permanent disability.
- Closed School Discharge – If the school closes while the borrower was enrolled or shortly after withdrawal, the borrower may be eligible for a discharge.
Read More: What Happens if You Don't Pay Student Loans
A borrower can request a discharge of student loan debt in a Chapter 7 bankruptcy case by showing that repaying the debt would create “undue hardship.”
- The Hill: More Millennials Living With Parents
- Department of Justice USAO: Bankruptcy and Bankruptcy Fraud
- United States Courts: Bankruptcy Basics
- Federal Student Aid, An Office of the U.S. Department of Education: How to Repay Your Loans, Discharge in Bankruptcy
- Federal Student Aid, An Office of the U.S. Department of Education: How to Repay Your Loans, Forgiveness, Cancellation and Discharge
- Federal Student Aid, An Office of the U.S. Department of Education: How to Repay Your Loans Forgiveness, Cancellation, and Discharge, Public Service Loan Forgiveness
- Federal Student Aid, An Office of the U.S. Department of Education: How to Repay Your Loans Forgiveness, Cancellation, and Discharge, Teacher Loan Forgiveness
- Federal Student Aid, An Office of the U.S. Department of Education: How to Repay Your Loans Forgiveness, Cancellation, and Discharge, Total and Permanent Disability Discharge
- Federal Student Aid, An Office of the U.S. Department of Education: How to Repay Your Loans Forgiveness, Cancellation, and Discharge, Closed School Discharge
- Congress.gov Legislation 115th Congress H.R.1625 – Consolidated Appropriations Act, 2018
- Department of Justice USAO: Totality of the Circumstances
Debra McLoughlin is a legal writer who graduated from Rutgers Law School and is licensed to practice law in New Jersey. A journalist at heart, she is proficient at researching legal issues and creating knowledge-based content to engage readers searching for legal information, news, or services.