Yes, they can. But it is a very difficult, and expensive process. This blog entry discusses student loans in the context of both a chapter 7 and chapter 13 bankruptcy case.
Student loans can only be discharged in bankruptcy if the debtor can show that the student loans cause “undue hardship.” To show “undue hardship,” the debtor must meet three criterion (known as the “Brunner Test”). These criterion are:
1. Repayment of the loan would prevent the debtor from maintaining a minimal standard of living;
2. The debtor’s financial situation is likely to continue for the foreseeable future; and
3. The debtor has made a good faith effort to make payments on the student loan in the past.
If a debtor successfully meets all criteria listed above, the debtor can show that there is undue hardship, and the student loan can be discharged in bankruptcy (this usually requires litigation, though). However, it is extremely difficult to meet all three criterion. Often, the federal student loan creditors (government) may make the argument that the loans can be repaid through an income based repayment plan, and be stretched out over several years. The aim of this approach is to show that the debtor can make payments, especially given the different repayment options available.
There are other ways to approach student loans outside the context of bankruptcy. This consists of different programs available, especially for federal student loans, such as the income-based repayment plan. Alternative methods for addressing student loans outside of bankruptcy will be discussed in future posts.
If you have questions about student loans and bankruptcy, please call today to schedule your free in-office bankruptcy consultation in Eugene.