Consumer Bankruptcy

Student Loans General Rule
Student loans, generally, are not dischargeable under any chapter of the Bankruptcy Code.

A Bankruptcy can, however, eliminate other debts that are competing for your dollars and provide a measure of peace during a Chapter 13 plan. Further, in a Chapter 13, some courts permit the debtor to separately classify a student loan so that a greater percentage of disposable income goes to the student loan than non-secured debt.

Exception
There is an extremely narrow exception to student loans. The borrower would have to show "undue hardship." This determination is for a judge to rule, but is usually made by a combination of factors.

Factors for "Undue Hardship"
Those who file bankruptcies in Michigan are subject to the laws as they are interpreted in the Ninth Circuit. The Ninth Circuit follows the test for undue hardship set forth in the cases of In re Brunner, In re Shankwiler and In re Pena. Those cases state that in order to demonstrate hardship for purposes of discharging a student loan, three criterion must be met: (1) the debtor must prove that he/she cannot maintain a minimal standard of living if forced to repay the student loans, based upon current income and expenses; (2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period; and (3) that the debtor made a good faith effort to repay the loans.

The court is required to exercise its discretion in determining whether and undue hardship does in fact exist.

First the courts will look to the net monthly income and subtract out reasonable monthly expenses.

Then it will look to see whether the debtor profited in the work force by his education and whether the debtors earning potential was increased by the education.

Lastly the court will look to see what efforts the debtor made to repay the loans, and whether the debtor had requested a deferment or not.

The inquiry is guided by the idea that the debtor's bad financial condition and default should not have been caused by the debtor's own willfulness or negligence, but rather by factors beyond the debtors control. Each case will of course turn on its own facts and it will be incumbent upon the debtor's attorney to convince the court that "undue hardship" does in fact exist in the debtor's case.

Bottom line: your student loans probably aren't going away in a bankruptcy, but at least you'll better be able to afford them.