You may have heard that student loan debt will live forever unless you pay it off, qualify for loan forgiveness or pass away before you are forced to pay it. The general wisdom is that bankruptcy is not an option to discharge student loans, but this is often not the case. Today we look at which debtors are most likely to get their student loans forgiven in bankruptcy.
Passing the Brunner Test
You may have thought when you were done with college, you were done with tests, but if you want to have your student loans discharged in bankruptcy, the Brunner test is the first hurdle. Here are the three prongs of the test that you must meet in order to even be considered a candidate for discharge:
#1 With your current income and expenses, paying your student loans will prevent you and your dependents from maintaining a minimal standard of living.
#2 Your current financial situation is likely to continue for the majority of your student loan repayment period.
#3 You have made a good faith effort to repay your student loans.
Using a Lawyer
This is one aspect of some recent bankruptcies I found very interesting. Many who have filed a successful adversary proceeding – the special request to have student loans discharged – have done so acting pro se (representing themselves). This actually makes sense because if you can afford an attorney to represent you – at a cost of $2,500 or more – this may convince the court you can afford to pay your student loans. The good word here is that you can get a successful result without a high priced attorney fighting for you. In one successful case, a filer handwrote her pleading and was successful!
Many of those that successfully won discharge of student loan debt had medical problems that prevent them from being able to work at their potential and service their debts. One couple was able to get roughly $500,000 of student loans forgiven. The husband piled up a ton of debt in dental school but then suffered a stroke that has left him unable to ever hope to work in his chosen field. His wife is unemployed and involved in her husband’s care taking. While not all cases of forgiveness are this extreme, having a medical explanation for why you can’t repay your loans is helpful.
Age of Debtor
Another characteristic that’s common with many successful bankruptcy petitions is that the debtor is aged 50 or older. With retirement on the horizon, the courts seem to be more sympathetic to those who are facing life on a fixed income. Student loans can make the difference between a tolerable standard of living and a subsistence-level existence. It makes sense that the court would cut a break to those that educational debt could ultimately follow to the grave.
Loan(s) that Benefit Others
Lastly, another trait of several of several of last year’s successful student loan discharge cases is that the the loans didn’t benefit the debtor. Many parents and grandparents take out student loans to benefit their offspring and if the beneficiaries of the loans don’t (or can’t) shoulder the payments, many older Americans find they are stuck with their kids’ debts. The court may be sympathetic to parents that take on loans with the expectation that their children will service the debt and cannot afford to pay them.
If you truly cannot afford your student loans, you have a couple of different options. If you can get into an Income Based Repayment plan, you can get payments as low as $0 per month and forgiveness after 25 years. We wrote recently about expanded access to IBR. For many borrowers, this may be a preferable program to trying to wrangle with the bankruptcy court. But for those that are not eligible for IBR and that cannot afford their loans, an adversary proceeding may be worth a shot.