In limited circumstances, you can discharge student loans in bankruptcy, although many people drowning in student loan debt do not know this is a possibility, according to the study An Empirical Assessment of Student Loan Discharges and the Undue Hardship Standard, by Jason Iuliano, published in the American Bankruptcy Law Journal.
What Are the Chances?
Among bankruptcy filers daring enough to ask the courts to discharge their student loans, 40% received some sort of remedy, either full or partial discharge, noted Iuliano much to the surprise of industry observers. The courts granted 25% of the filers a complete discharge of all student loan debt. The takeaway from Iuliano’s study is that it is worth the effort to at least request student loans be discharged in bankruptcy, because even if the courts say "no" in most cases, they say "yes" in some.
Passing the Brunner Test
Most bankruptcy courts use the three-part Brunner test to determine whether bankruptcy filers qualify for a discharge of student loan debt. The test is named after Marie Brunner, a bankruptcy filer in the state of New York, who in the 1980s attempted to have her student loan debt discharged. The case, ultimately unsuccessful, established the three-part test. Filers must prove that repaying the loans would cause them to live in poverty. They must show their financial situation is not likely to change. They must also show they made a good-faith effort to repay the loans.
Student Loan Debt Forgiveness
Consumers with high student loan debt should explore forgiveness and repayment assistance programs to manage the debt. For example, people who pursue careers in public service, such as teaching, medicine and law, and meet certain criteria may be eligible for partial or full-loan forgiveness. The U.S. Department of Education and state departments of education post information regarding student loan forgiveness on their websites.