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Discharging student loan during bankruptcy

On Behalf of | Feb 8, 2019 | Bankruptcy

Minnesota residents have likely inquired about discharging student loans. They may have found that student loans are not usually able to be discharged in a bankruptcy. However, as with all things, there are some exceptions.

It’s estimated that in the United States, there are 44 million people with student loans, collectively owing $1.5 trillion. This means that student loans are the second largest type of debt in the United States, just after mortgages and ahead of credit card debt.

A student loan is not like consumer debt. Depending on the circumstances, consumer debt can be discharged in bankruptcy. In 2005, Congress along with President George W. Bush enacted a law that exempted student loans from discharge.

There are a number of rationales behind why the government decided to exempt student loans from bankruptcy discharge. Some believe that there was a concern that students would go to university and rack up enormous debt, earn a degree and then file for bankruptcy. The lender would be out the money, and the student would still have their degree.

If the borrower can show that the student loan creates an undue hardship, they may be able to discharge it via bankruptcy. Although Congress did not specifically outline what undue hardship meant, many accept that the Brunner test is the standard for determining undue hardship. This test looks at circumstances including not being able to repay the loan while maintaining a minimum standard of living, the borrower trying to repay the loan in good faith, and the undue hardship continuing throughout the term of the student loan.

If a student is struggling to repay their student loans and is considering filing for bankruptcy, they may discuss their circumstance with a bankruptcy attorney. A bankruptcy attorney may evaluate their situation and provide suggestions on how the student could get the best possible outcome during their bankruptcy filing.

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