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Options for Debtors with Student Loans

Many debtors considering bankruptcy have a wide variety of types of debt. Debts range from medical bills, to credit cards and pay day loans, to homes and cars, and even student loans. The Bankruptcy Code affords little to no relief for debtors burdened with student loans. The general rule is that student loans are not dischargeable in bankruptcy. There is an exception to the general rule, referred to as a hardship discharge. Debtors should be aware that this is a very rare exception and as a practical matter is very unlikely.

Many courts use the standard established in Brunner v. New York Higher Education Services, 831 F.2d 395 (1987), requiring debtors to meet a three part test. The debtor will have to show: that he cannot maintain a minimal standard of living and repay the loan, that his current financial situation is likely to exist for most of all of his repayment period, and that he has made a good faith effort to repay the loans. The court goes on to say that in the case examined the debtor was not disabled or elderly and did not demonstrate a “total foreclosure of job prospects in her area of training”. While the court does not expressly state that one must be elderly or disabled, it would appear that these are turning points of analysis. In a struggling economy debtors might be inclined to make the argument that there are not jobs available. Importantly, a struggling economy is not likely the same as a total foreclosure of job opportunities. Further, even if the debtor can meet one of the criteria he still likely needs to meet all three criteria.

Unfortunately, the reality is that there are very few options for those struggling with student loan payments. If the loans are federally guaranteed the debtor may be able to enter into an income based repayment program or qualify for deferment or forbearance. Private lenders are less likely to work with debtors on income based repayment. In any case, the best course of action is to contact the lenders before the loans are in default as there are more options available pre-default. Defaulting on student loans can have a number of negative consequences, including but not limited to: wage garnishment, negative credit reporting, and seizure of tax refunds.

Many debtors choose to pursue bankruptcy despite the fact that student loans are not dischargeable as eliminating other debts help the debtor to afford student loan payments. If you have questions, or would like to schedule a free consultation, contact a St. Louis BankruptcyAttorney Today.

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