Student loans are very much in the news these days, as political parties debate whether student loans should be forgiven. Student loans are a hot topic, but your student loans still have to be paid as of this writing. So what does it mean to have your debt discharged?
Debt discharge is defined as the cancellation of debt through bankruptcy. When a debt is discharged, the debtor is no longer responsible for the debt, and the creditor is no longer permitted to engage in collection attempts.
When individuals find themselves in financial distress, they often wonder if they can have their student loans discharged through bankruptcy. Student loans are handled differently than other types of debt. Student loan debt can be discharged, but there is essential information surrounding the process that you should know.
There are specific circumstances in which student loans may be discharged.
According to Section 523(a)(8) of the U.S. Bankruptcy Code, your student loan cannot be discharged unless not discharging that debt “would impose an undue hardship” “on the debtor [you] and the debtor’s dependents.” Interestingly, although the bankruptcy code defines most terms it uses, for some reason, the term “undue hardship” is not explicitly defined for us. Therefore the bankruptcy courts have been relegated to deciding on hardship on a case by case basis.
The word “undue” indicates a standard (or level) that is higher than simple hardship.
“Undue” is defined as “exceeding what is appropriate or normal; excessive.” Therefore to discharge a student loan, experiencing hardship is not always sufficient. You must be in an extraordinary situation. But how is this level of hardship determined in a real-life situation?
Undue Hardship – The Three-Part Test
As bankruptcy courts across America have tried to interpret “undue hardship consistently,” they have established a 3-part test. While some courts may have variances to this test, the basic criteria are as follows:
1. If you had to make payments on the student loan, given your current level of income and expenses, you would be unable to maintain a minimal standard of living.
2. This inability to maintain a minimal standard of living is expected to last throughout the loan repayment period.
3. A meaningful effort was made to make payments or qualify for forbearances or payment-reduction programs.
The Three-Part Test: Timing Matters
Considering each of these three conditions, you can see that each is related to your situation’s timing in a different way. The timing of your bankruptcy filing may significantly impact your qualifying for undue hardship or not.
1. The first condition focuses on the present situation. As of the time of the filing – your current situation – can you make your loan payments?
2. The second condition focuses on the future. Will your adverse situation perpetuate into the months and years ahead and throughout the loan period?
3. The third condition focuses on the past. Have you acted in good faith in the past and tried to make good on the loan?
The reason why the timing of your filing is so important is that your situation may change over time. For instance, you may be currently able to pay for your student loans, but you know you are losing your job within three months. So at the moment, you are not experiencing undue hardship, but in 4 months, you may in fact qualify.
If you are wondering if you are eligible to have your student debt discharged, you should consult with a bankruptcy attorney. Together, you can decide when the optimum time is to petition the court.
Richard V. Ellis is a Sarasota bankruptcy attorney with decades of experience helping individuals navigate personal bankruptcy.