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Millions of people file bankruptcy each year, but only a small fraction of people try to include their student loan debt because they believe that student loans cannot be included. This is a myth, though doing so is complicated. You’ll need to work with an attorney, but when faced with student loan debt repayment, it is important to explore all of the options available.

Today, there are several student loan repayment and forgiveness options:

  • Forbearance and deferment will postpone payments for a specified length of time, and loans may or may not accrue interest during the postponement.
  • Loan consolidation combines several loans into one bigger loan, which may help. It may also give you the chance to explore other payment plans.
  • Loan cancellation is a possibility in the event of death or disability.
  • Student loan forgiveness may be possible through special programs for those who go into the military, teach in or serve needy populations, work in the health care field, become a victim of identity theft and others.

Filing bankruptcy when you have student loans

If repayment options or postponement are not possibilities through your financial institution, then you may need to consider filing bankruptcy. Filing bankruptcy against student loan debt is a little tricky. A bankruptcy court can discharge student loan debt that causes undue hardship to the borrower. However, the bankruptcy laws do not clearly define “undue hardship,” and it rarely finds this is the case for most potential filers.

However, bankruptcy may still help you retake control of your finances. If you carry a lot of other types of eligible debt, like credit card debt or medical debt, a successful bankruptcy filing would free up funds to continue paying on your student loans.

The Brunner Test

Most courts use the Brunner Test to determine if a consumer is eligible to discharge student loans through bankruptcy. To “pass” the Brunner Test, you must meet these requirements:

  1. Paying the debt won’t allow you to maintain a minimum standard of living.
  2. Your financial situation is unlikely to change for some time.
  3. You must have made good faith efforts to repay the loan.

Also, courts will only accept loans received from educational institutions that participated in federal student loan programs, and the funds must have been used for the cost of attending school. This leaves out debt accrued from private student loans and certain educational institutions that do not receive federal funding.

The bottom line

You have an obligation to repay student loans, even if you have to make some financial sacrifices. But if you are unable to repay the loans and have exhausted all other repayment options, your loans may be eligible for a discharge through bankruptcy. The process is technical and one that you do not want to attempt alone. It is important to work with an attorney who has experience in dealing with student loan debts.