Ever heard of Student Loan Chapter 7? Student loan debt is a huge financial burden for millions of Americans.
Graduates’ average student loan debt is over $30,000 and continues to rise yearly. Many graduates struggle to make monthly payments, and the debt can feel inescapable.
However, one way to legally discharge student loans is by filing for Chapter 7 bankruptcy.
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What is Student Loan Chapter 7 Bankruptcy?
Chapter 7 bankruptcy, or liquidation bankruptcy, is a legal process that wipes out many of your debts and allows you to make a fresh start financially.
When you file for Chapter 7 bankruptcy, a bankruptcy trustee collects and sells all your assets that are not exempt under the law.
The proceeds from the sale are then divided among your creditors. After this process, most remaining unsecured debts are discharged, meaning you are no longer legally obligated to repay them.
However, not all debts can be discharged through bankruptcy. Certain types, like child support, alimony, and most taxes, cannot be eliminated.
Student loans also used to be non-dischargeable in bankruptcy. But that changed in 1998 with a court ruling that opened the door for some student loans to be discharged under specific conditions.
The Brunner Test for Discharging Loans
To get your student loans discharged in bankruptcy, you have to pass what is known as the Brunner test.
This test stems from a 1987 court case between Marie Brunner and New York State Higher Education Services Corporation.
The case resulted in a ruling that set the standard for determining if discharging student loan debt would cause “undue hardship” on the borrower.
The Brunner test requires you to prove three things:
- You cannot maintain a minimal standard of living if forced to repay your student loans.
- Your financial situation is likely to persist for most of your repayment period.
- You have made good-faith efforts to repay the loans.
This three-pronged test has proven difficult for many borrowers to pass. Judges have a lot of discretion on how they interpret the Brunner test.
Some are more sympathetic than others when it comes to determining hardship. The burden of proof is also on the borrower to convincingly argue their case.
But getting your loans discharged is possible. By understanding the specifics of the Brunner test, you can tailor your filing to hit all three points.
Documenting Your Inability to Repay
When petitioning for discharge under the hardship clause, you must comprehensively prove your inability to maintain a minimum standard of living while repaying your student loans.
You must provide an itemized budget showing your average monthly income and expenses to do this. Be sure to include everything from rent and food to transportation and medical costs.
The best way to illustrate that student loans prevent you from meeting basic needs is to show a monthly recurring deficit.
If your average monthly expenses exceed your reliable income, that helps build a discharge case.
Having no discretionary income after paying regular bills demonstrates that loans impose undue financial strain.
In addition to a budget, collect documentation that supports your income assertions. Recent pay stubs, benefit award letters, or tax returns are useful for validating monthly earnings.
Also, gather evidence of your expenses, like utility bills and loan statements. The more proof you have to back up your hardship claims, the better.
Proving Persistent Financial Difficulty
To satisfy the second part of the Brunner test, you must convince the court that your financial problems are long-term rather than temporary.
Debtors need to show they have struggled with repayment over an extended period and are unlikely to see their situation improve in the future.
One way to demonstrate persistent difficulty is by detailing your repayment history.
If you have consistently fallen behind on payments or requested forbearances, that helps indicate your hardships are not just short-term.
You can request records from your student loan servicer that document periods of nonpayment, deferments, and attempts at different repayment plans.
Submitting evidence of job loss or income decline also helps verify the ongoing hardship. If you have had periods of unemployment or had to take a lower-paying job, provide documentation.
Letters from former employers, proof of unemployment benefits, and pay stubs from lower-paying jobs are useful for meeting this part of the test.
The goal is to convince the judge that your financial troubles span well beyond a temporary setback.
Showing Good Faith in Repayment Efforts
The crux of the Brunner test is proving that you have made good faith efforts to repay the student loans you want to discharge.
This means demonstrating you have done everything possible to pay back the debt but have still experienced undue hardship.
To establish your good faith, take steps like:
- Making regular loan payments when possible
- Asking lenders about alternative repayment plans
- Setting up payment plans or re-negotiating terms with lenders
- Avoiding unnecessary expenses and cutting costs where feasible
- Working extra hours or additional jobs to increase income
- Seeking assistance from deferments or forbearances when necessary
Save documentation like correspondence with loan servicers requesting alternate payment plans, deferment approval letters, and receipts showing loan payments.
The more evidence you have of your efforts to meet repayment obligations, the stronger your case will be.
Even signing up for income-driven repayment plans shows good faith. Seeking bankruptcy discharge as a last resort after exhausting options like income-based plans portrays your situation accurately.
Keep records of any steps you’ve taken to explore repayment options to exhibit responsible conduct.
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Finding a Bankruptcy Lawyer
Discharging student loans in Chapter 7 without an attorney is extremely difficult.
Identifying a knowledgeable bankruptcy lawyer is key for navigating the complex Brunner test requirements.
Look for an attorney experienced specifically in fighting student loan creditors.
Schedule consultations to find someone well-versed in the nuances of getting student debt discharged under hardship clauses.
Ask about their experience with adversary proceedings against lenders. An attorney regularly handling these cases will know how to compile persuasive arguments and documentation.
Be transparent about your financial situation and repayment history during the initial consultation.
This helps the lawyer assess if your case meets the stringent standards for a successful undue hardship claim.
If the attorney believes you have a chance, they will explain the Chapter 7 process, the costs involved, and their plan for building your case.
The Adversary Proceeding
Filing a Chapter 7 petition begins the bankruptcy process, but an additional step is required to discharge student debt.
You must initiate an adversary proceeding against the lender to prove undue hardship, specifically for student loans.
This is a trial where you argue your case for loan discharge to a bankruptcy judge.
After filing Chapter 7, your lawyer will submit a complaint to launch the adversary proceeding against the student loan creditor.
This involves more interactions with the court and direct disputes over-discharging your particular loans.
The lender can fight the discharge by claiming you do not meet hardship standards. Your attorney must combat their arguments and convince the judge through the Brunner test.
Rulings on adversary proceedings are very fact-specific – the judge weighs your financial situation against legal precedent on undue hardship.
Outcomes vary widely depending on how compelling your case is constructed. However, navigating the adversarial part of the process requires an experienced consumer bankruptcy lawyer by your side.
Life After Student Loan Discharge
Receiving a discharge of your student loan in Chapter 7 is life-changing. You can permanently remove that debt burden and no longer face threats from creditors, ruined credit, constant stress over repayment, and fears that loans may never get paid off.
This discharge provides a chance to regain financial control. However, your bankruptcy will remain on your credit report for 7-10 years.
That could make getting approved for future lines of credit more challenging.
You may have to rely on prepaid cards, secured credit cards, or credit builder loans to rebuild your credit score after bankruptcy.
And remember that any co-signers on discharged loans could still be on the hook for repayment.
Student loan creditors can legally pursue co-signers if the borrower receives discharge through bankruptcy. Before filing, discuss this risk fully with any co-signers.
Clearing student debt through Chapter 7 bankruptcy can improve your overall financial outlook despite these drawbacks.
Bankruptcy attorneys are skilled at advising clients on rebuilding credit after discharges. When years of burdensome student loan payments are eliminated, the benefits tend to outweigh the downsides for most borrowers.
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Trying to prove undue hardship and get student loans discharged through Chapter 7 bankruptcy takes work.
But for borrowers facing dire situations and unrelenting financial hardships, it remains one of the only legal options to escape crippling student debt.
By understanding the stringent Brunner test requirements and hiring an experienced bankruptcy attorney, some debtors can successfully argue for student loan discharge and get a fresh financial start.
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