A bankruptcy discharge does not discharge a debtor's obligation to pay student loans unless there is a court order stating that the student loans are discharged. It is the debtor's responsibility to ask for a determination of whether the loan has or will be included in the debtor's discharge.
What is Considered a "Student Loan"
The mere fact that the debtor incurred a debt while in school does not mean that the debt is presumed to be excepted from discharge. The law generally applies to three kinds of debt (1) obligations to repay debts for educational benefit that are made, insured, or guarantees by the government either directly or through a program that receives at least some of its funding from the government or a nonprofit institution (2) obligations to repay funds received as an educational benefit, scholarship or stipend, (3) obligations that qualify as educational loans under the tax code.
Bottom line - MOST debts having to do with furthering your education are "student loans" and are not automatically discharged through bankruptcy.
Discharging Student Loans through Bankruptcy
The ultimate burden of proving that a student loan should be discharged in bankruptcy rests with the debtor. However, the initial burden of proof belongs to the creditor, who must establish by a preponderance of the evidence that its claim is the type of "student loan" that does not get discharged in bankruptcy. This is a fairly easy burden since most loans to further your education are not discharged.
Once it has been established that the loan is the type that is not discharged in bankruptcy, the debtor must prove by a preponderance of the evidence that repayment of the student loan would impose an undue hardship on the debtor or the debtor's dependents. The bankruptcy law does not define "undue hardship", but most courts use what is commonly referred to as the "Brunner Test".
The Brunner Test is a three-part test for determining whether the repayment of a student loan should be discharged because it will impose n undue hardship on the debtors or the debtor's dependents. In order to prove an undue hardship, you must prove each of the three prongs of the test. The debtor must prove:
- That they cannot maintain, based on their income and expenses at the time of the filing, a minimal standard of living for themselves and their dependents. This is typically an easy hurdle to overcome for most people contemplating bankruptcy;
- That they made a good-faith effort to repay the student loans. Again, most people have made a common sense good faith effort to repay the loans;
- The existence of additional circumstances indicating the their state of affairs is likely to persist for a significant portion of the repayment period of the student loans. This is the most difficult hurdle to overcome and is the prong of the test where most debtors fail.
- Serious mental or physical disability which prevents employment or advancement
- The debtor's obligations to care for dependents
- The lack of, or severely limited education
- Poor quality of education
- Lack of usable or marketable job skills
- Maximized income potential in the chosen educational field, and no other more lucrative job skills
- Limited number of years remaining in the debtor's work life to allow for payment of the loan
- Age or other facts that prevent retraining or relocation as a means for payment of the loan
- Lack of assets which could be used to pay the loan
- Potentially increasing expenses that outweigh any potential appreciation in the value of the debtors assets and/or the likely increases in the debtor's income
- The lack of better financial options elsewhere
It is not necessary for debtors to show that a serious illness, psychiatric problem, disability of a dependent, or something which makes the debtor's circumstances more compelling than that of an ordinary person in debt. All that's necessary is evidence supporting the conclusion that the debtor's current situation is likely to persist. A debtor does not have to satisfy all elements of this list in order to show that the circumstance is likely to persist. However, just because the debtor can show one of these elements, does not mean the loans can be discharged.Garnishment by Federally backed Student Loans
15% of your net wages (after taxes) can be garnished from your check for federal student loans without any kind of judgment under an Administrative Wage Garnishment. Please see http://www2.ed.gov/offices/OSFAP/DCS/awg.html
Circumstances Likely to Persist
In order to discharge student loans through bankruptcy you must satisfy all three prongs of the Brunner Test. The most difficult to overcome is showing that the circumstances are likely to persist. The courts have given a non-exhaustive list of factors that judges could consider in determining if the circumstance is indeed likely to persist. These include: