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Student Loans and Bankruptcy
So you have decided to file a Chapter 13 bankruptcy proceeding to help bring order to your financial life and come up with a plan to help you pay your debts. Things are looking up. But what if a large portion of your debt is student loans?
Students Loans Given Special Status in Bankruptcy
If you were hoping to get a portion of your student loans discharged by filing a Chapter 13 petition, you most likely will be disappointed. Student loans have been given a privileged position by Congress when it comes to determining who gets paid in a bankruptcy proceeding. The student loans usually get paid. In most cases, the bankruptcy court will require that student loans be paid in full before qualifying for Chapter 13 bankruptcy. This is considered as a "priority" debt along with other debts such as child support and back taxes. Debts that are backed by collateral like a car loan or a mortgage must also be repaid before a person qualifies for Chapter 13 protection.
The Brunner Test
There are few cases where student loans can be discharged by a bankruptcy proceeding. In order for this to happen, a person must meet what is called the Brunner Test, named after a 1987 New York case. In order to have student loans discharged, a person must prove that (1) based on current income and expenses, he or she cannot maintain a minimal standard of living for himself or herself and dependents if forced to pay student loans, (2) additional circumstances show that this will continue for a large portion of the student loan's repayment period, and (3) the debtor has made a good faith effort to repay the loans. Courts have interpreted the Brunner Test to mean that the debtor must basically be living below the federal poverty level to have any chance of meeting the test. The Brunner Test is extremely difficult to meet and, in most cases, courts will require payment of student loans in full.
If you have substantial monetary responsibilities that are becoming impossible to meet, consult with an experienced bankruptcy attorney to discuss your legal options.