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Student Loans and Bankruptcy

Student loans are difficult, but not completely impossible to discharge in bankruptcy.  It’s like getting your teenager to pick up his room.  You might get lucky, but then again it might be easier to get out the leaf blower and work it that way.

The official standard is to show that paying off the student loans will impose an “undue hardship” on you and your family.  Since the Bankruptcy Code does not define “undue hardship”, a lot of discretion is left to each individual judge – and there are over 300 of them around the country.  One person’s undue hardship can be another person’s slight inconvenience.  This holds true for judges as well.

Here in the picturesque 9th Circuit, which includes California, the court uses the Brunner Test and holds a tough line.  After retaining a bankruptcy attorney in Los Angeles or Orange county, to have your student loans discharged you must prove the following in a special hearing:

  1. You cannot maintain, based on current income and expenses, a ‘minimal’ standard of living for you and your dependents if forced to repay the loans;
  2. Additional circumstances exist indicating that this state of financial affairs is likely to persist for a significant portion of the repayment period of the student loans; and
  3. You made good faith effort to repay the loans.

There are a few other circumstances under which the loans can be cancelled outside bankruptcy:

  1. You die or become totally and permanently disabled;
  2. Your school closed before you could complete your program; or
  3. You work in certain designated public school service professions (including teaching in a low-income school).

You can get more information about these situations on the Federal Student Aid Office website.

Even if you don’t reach the high standard to have your student loans discharged in bankruptcy, discharging all your other debt leaves you in a much better position to attack them with the skill and fervor you applied in your teenager’s room.

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