How to cancel your student loans in bankruptcy

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The test

Bankruptcy court will cancel your student loans if you'll be able to prove that repayment would pose "undue hardship." Courts apply the so-called Brunner test, under which you must show all of the following:

 1. You cannot maintain a "minimal standard of living"  if forced to repay the loans;

2. That additional, exceptional circumstances exist, strongly suggestive of continuing inability to repay over an extended period of time; and

3. That you have made good faith efforts to repay the loans. Brunner v. New York State Higher Education, 831 F.2d 395 (2nd Cir. 1987).

Basically, it will be very hard to convince the judge that, despite still being at the start of your career, you will almost never be able to make enough to live on and repay the loans. Nevertheless, if any of the cases below are close to your situation, you might have some luck in discharging your student debt.

Older debtors

Older debtors will have easier time to convince the court of their undue hardship. For example, a 49 year old Chapter 7 debtor who, after graduating 26 years prior to filing for Chapter 7 from prestigious Ivy League school, had been unemployed or underemployed (as a waiter/bartender, etc.) for many yearssince he graduated, due to various circumstances not entirely within his control, was able to satisfy the "undue hardship" test for his $80,000+ student loan debt because he was currently unemployed, penniless, homeless and receiving food stamps. Despite having sent out employment applications to more than 40 restaurants, had been unable to obtain work in food and beverage industry. In re Mabry, 398 B.R. 339 (Bankr. E.D. Mo. 2008)

Medical problems

Chapter 7 bankruptcy debtors with very serious medical problems might be able to get some relief from the bankruptcy court. For example, a permanently disabled due to blindness Chapter 7 bankruptcy debtor with diabetes, who was not even eligible for a  driver's license showed that he could not maintain a "minimal standard of living" under the "undue hardship" Brunner test. His only source of income was Social Security Disability (SSD) benefits. Nevertheless,the bankruptcy court still ordered him to pay $20.00 per month on his student loans, and precluded the student loan creditor from attempting to collect moreIn re Wallace, 443 B.R. 781 (Bankr. S.D. Ohio 2010).

Medical problems don't have to be physical, as mental retardation might qualify one for bankruptcy discharge of student loans as well. Chapter 7 bankruptcydebtor with a college degree in art education and an IQ of 58, had inability to communicate in English, had verbal and math skills that were in "preschool range," and was within the mildly mentally retarded range. He was able to satisfy the second prong of the Brunner test by showing that he would be unable to maintain the minimal standard of living for himself and his two dependent children, and this was likely to persist for significant portion of loan repayment period. In re Vang, 324 B.R. 76 (Bankr. W.D. Wis. 2005).

The 9th Circuit Court of Appeals decided that it was clearly erroneous for a lower court to determine that debtor's inability to pay his student loans would not persist throughout a substantial portion of the repayment period, where debtor, who lived at or below the poverty line for many years, suffered from severe Attention Deficit Disorder (ADD), and there was nothing to suggest that the debtor's financial situation would would improve during the student loan repayment periodIn re Mendoza, 182 Fed. Appx. 661 (9th Cir. 2006).

Children

The bankruptcy court granted a Chapter 7 bankruptcy discharge of $300,000 of student loans to a mother caring full-time for her her five young children, including autistic twins, when her expenses included an $850 payment for a new vehicle and a $373 payment on a second mortgage. The court determined that she would be unlikely to work until the twins reached the age of majority, if at all. In re Walker, 650 F.3d 1227 (8th Cir. 2011).

Divorced, 31–year–old mother of two children, who received no child from her ex-husband, who had been unemployed for more than one year, was entitled to a Chapter 7 bankruptcy discharge of her $47,000 in student loan debt (but only $13.03 per month). Her income from a low-paying clerical job was significantly less than her monthly expenses, even considering that she received financial assistance, 9-year-old car, and free child care from her relatives. She had never earned more than $10.50 per hour. In re Lee, 345 B.R. 911 (Bankr. W.D. Ark. 2006).

Partial discharge

Bankruptcy court may discharge some of your student loans, if you satisfy each prong of the Brunner test as to portion of this debt. 11 U.S.C.A. § 523(a)(8). In re Nixon, 453 B.R. 311 (Bankr. S.D. Ohio 2011). For example, a Chapter 7 bankruptcy debtor with $40,000 of imputed income per year who was not able to pay to meet her $2,456 per month in non-student-loan expenses, which is what she would incur after moving out of her parents' home, was able to obtain partial discharge after showing that it would be undue hardship to require her to pay $850 per month on her student loans. The bankruptcy court determined that she could still pay approximately $300 per month and partially discharged her student loans to reduce her monthly payment to $300In re Groves, 398 B.R. 673 (Bankr. W.D. Mo. 2008).

Deferral

It is possible that the bankruptcy court will give you more time to repay your student loans after you file for Chapter 7 bankruptcy. For example, the bankruptcy court granted a Chapter 7 bankruptcy debtor, a father of 10 children, a four-year deferral of payments on his student loans, after which he could reopen his bankruptcy case to petition the court for further relief. In re Simmons, 334 B.R. 632 (Bankr. C.D. Ill. 2005).
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