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Bankruptcy & Student Loans

Swindell Law Firm March 18, 2022

Man calculating student loan with calculator.Student loan debt in the United States totals $1.749 trillion, with some 43.4 million borrowers having federally insured student loan obligations, averaging about $37,113 each. If you factor in private student loan debt, the average balance comes in at about $40,904, according to the website Education Data.

Filing for bankruptcy is a legal means to obtain a fresh start financially. When it comes to student loan obligations, U.S. law establishes a high bar for discharging those obligations.

While credit cards and other consumer debt are freely dischargeable, getting a student loan forgiven is possible only if the debtor can prove that the debt “would impose an undue hardship on the debtor and the debtor’s dependents.”

If you’re facing financial hardship in Amarillo, Texas, and need help obtaining a fresh start in life, contact me at the Swindell Law Firm. For four decades, I have helped people in the Texas Panhandle, including Borger, Pampa, Hereford, and Dumas, find solutions to their crushing debt loads and move on in life.

If you have student loans, there are programs to modify the conditions and make it easier to fit repayment into your budget, even when it proves difficult to meet the “undue hardship” bar of the bankruptcy code.

Defaulting on a Student Loan

If you default on a student loan obligation, you can face garnishment of your wages at work, seizure of your bank account, forfeiture of any tax refund owed to you, and even a lien on your home.

While you can face these consequences for other loan obligations, student loans are different. Most consumer debt obligations are forgivable in bankruptcy, with exceptions for child and spousal support, unpaid taxes, and student loans, which generally must be honored.

To get free of a student loan in bankruptcy, the borrower must initiate an “adversary proceeding,” basically suing their lender to prove they are facing an undue hardship and cannot repay the obligation. This is a step beyond a simple bankruptcy filing. A court case likely will ensue, pitting you – the borrower – against the lender, and the time in court proving your hardship can run up your legal costs.

Bankruptcy and the Brunner Test for

Student Loan Forgiveness

Chapter 7 of the U.S. bankruptcy code generally allows the discharge of almost all debts through the liquidation of non-exempt assets. Chapter 13 allows restructuring of debt obligations to fit the filer’s income level but does not allow student loans to be forgiven without proving “undue hardship.”

Since 1987, most courts have relied on the standard for proving undue hardship that was established in Brunner v. New York State Higher Educ. Servs. Corp., a decision by the U.S 2nd Circuit Court of Appeals. The resulting Brunner Test requires anyone filing for relief from a student loan to establish three elements:

  1. The debtor and their dependents cannot maintain a “minimal” standard of living if required to repay the loan.

  2. Evidence is submitted showing that this state of affairs is likely to persist throughout the length of the repayment period.

  3. The debtor has made good faith efforts to repay the loan.

Other courts may use different tests to determine if a student loan should be discharged. One such test is called the “totality of circumstances test.” Here, the court will look at all relevant factors in your case to determine if it will be an undue hardship for you to repay your student loan. Whatever test is used, the bar is generally high, though not insurmountable.

How an Experienced Attorney Can Help

Whenever your debts get out of hand and you’re being dunned almost daily by creditors for payment, bankruptcy is a clear option for a fresh start. Having student loans, however, can further complicate any bankruptcy filing, so you need to consult with an experienced bankruptcy attorney to weigh your options. Though it’s not impossible to get out of student debt obligations, it poses an additional barrier to the bankruptcy process.

If you’re seeking a fresh start through bankruptcy anywhere in the Texas Panhandle, contact me immediately at the Swindell Law Firm. With more than 40 years of experience in helping people achieve a fresh start, I can help you get your debts eliminated or under control so you can move forward with your life. I proudly serve clients in the entire Texas panhandle, including Amarillo, Borger, Pampa, Hereford, and Dumas.