Overland Park, KS Student Debt Management Lawyer 

Exploring Chapter 7 Bankruptcy for Student Loans

In a typical Chapter 7 bankruptcy, unsecured debts–which include credit cards and personal loans–can be wiped out if the court approves your plan. But there’s one big exception–student loan debt is not automatically forgiven in a Chapter 7 bankruptcy. 

Now, this doesn’t mean all is lost. You can still get relief, but you must enter what’s called an adversary proceeding. This is a term used in bankruptcy law that essentially means that we are bringing a new lawsuit on your behalf. In this proceeding, the aim is to prove that your student loans are causing undue hardship. 

Undue hardship can be a hard thing to define. What the lending institution might see as an appropriate sacrifice might actually be a debilitating hardship for you. It’s up to your student debt lawyer to help you show otherwise. And courts have developed some consistent criteria on the factors they’ll consider. 

The Brunner Test Explained: This goes back to a 1987 court case, Brunner v. New York State Education Services. Marie Brunner sought to get her student loans wiped away less than a year after getting her master’s degree. That didn’t work for her, but the case allowed courts to develop a three-step process for the future. Brunner guidelines consider poverty, persistence, and good faith. 

Poverty might be a harsh term that doesn’t really define where you are, but it is what the courts will call it if your current income doesn’t match your current expenses. Persistence indicates that the difficult financial situation is more likely than not to continue. Good faith demonstrates that you’ve done the best you can to pay off the loan. 

Courts that do not use Brunner criteria may instead use the Totality of Circumstances test. This is not substantially different from Brunner in that it considers your financial resources and living expenses. The final criteria are “other relevant facts and circumstances,” a vagueness of language that can either work for you or against you depending on how well your case is presented.

There are a lot of myths floating around about the bankruptcy process, including one that says hardship relief is almost impossible to come by. It’s why less than 1 percent of people who file for Chapter 7 even bother to try the adversary proceeding process. But the myth is completely unsupported by data. A study has shown that 40 percent of those who applied for hardship were able to get at least partial relief for their student loans. 

So, the myth is not only wrong, but also financially damaging if it scares anyone off. A bankruptcy court that decides hardship applies may, at minimum, give you a payment plan with lower interest rates. They might reduce the overall value of the loan. Or they might discharge the entire debt.