The relationship between student loans and bankruptcy
Having tens of thousands of dollars in debt can be problematic, especially for people who are just launching their careers and earning modest incomes. When trying to make ends meet, some may consider the option of filing for bankruptcy. Debt from student loans can be difficult to discharge, though it is sometimes possible.
Before seeking out bankruptcy, the U.S. Department of Education points out that there may be other ways to improve a financial situation. Certain federal loans may be forgiven or canceled based on individual circumstances. For example, if the school committed fraud or closed, the loans could be discharged.
However, for those who do not meet any of the federal guidelines, there is the undue hardship exception. Generally, bankruptcy will not wipe out or reorganize student loan debt and instead can address other items, such as a mortgage or credit card debt. This would free up money that could then be used to pay off student loans.
The undue hardship exception applies to people who are able to demonstrate that having to pay a student loan would create significant turmoil. Illinois courts use the Brunner test, which means that a debtor must meet all three of the following:
- Must have made a good faith effort to pay the loan
- Must be unable to maintain the minimum standard of living based on current income and other expenses
- Must not have any upcoming change in his or her financial situation
The courts will weigh these factors to determine if student loans could be addressed during a bankruptcy proceeding.