Can I Claim Bankruptcy on Student Loans?
With the cost of higher education skyrocketing, student loans can quickly add up to tens of thousands of dollars. According to The Smart Student Guide to Financial Aid, the average college senior graduates with student loans totaling $23,186. Although student loans can be a huge load on your credit profile, they usually can't be discharged in bankruptcy.
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Types of Loan
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There are three major types of loans you can get for college: traditional student loans like Stafford or Perkins loans, parent loans like PLUS loans and private student loans or alternative student loans. Once you've graduated, you may opt to consolidate your loans into one. Over two thirds of college graduates graduated with some student loan burden after graduation as of 2008.
Student Loans in Bankruptcy
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Student loans are almost impossible to discharge in bankruptcy. In order to get your student loans included in your bankruptcy, you must demonstrate to the court that continuing to pay the loans will cause "undue hardship on you and your dependent." Courts will use a test to determine whether your case meets the undue hardship requirement. Which test the court uses will depend upon its policy. However, the Brunner test is commonly used.
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Brunner Test
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The Brunner test requires you to show the court that you can't maintain a minimal standard of living for you and your dependents if you have to pay back your student loans. The test is based on your current income, not your future earnings. However, an additional part of the test requires you to demonstrate that your situation is unlikely to improve for a significant period and that you have tried in good faith to make loan repayments.
Alternatives
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Although you can't generally discharge your loans during bankruptcy, there are several alternatives for reducing your debt. Loans forgiveness programs for volunteer work or public service pay a portion of your debt for every year of work. You may also be able to have some or all of your loan forgiven if you join the military. If a loan forgiveness program isn't an option for you, ask your lender about Income Based Repayment, in which your loan payments depend on how much you earn.
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References
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