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Can bankruptcy now discharge student loan debt? It’s not that simple

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It is not often a bankruptcy court ruling makes national headlines. Yet one recent case involving student loan debt did just that, with words from the judge offering a glimmer of opportunity for the countless individuals saddled with such loans.

In the case, a chief U.S. bankruptcy judge in Manhattan discharged a Navy veteran’s staggering $221,000 in student loan debt. In making the decision, the judge took aim at the widely held belief that student loan debt can not be discharged through bankruptcy. The courts, she wrote, “will not participate in perpetuating these myths.”

Despite the attention the quote received, this does not mean every student loan borrower can file bankruptcy and see their debts disappear.

Proving undue hardship

For decades, many experts have said student loan debt can not be discharged through bankruptcy. In reality, it was possible – but viewed as highly improbable. To see student loan debts wiped away required clearing a very high bar. You had to prove paying them back caused “undue hardship,” which is quite difficult.

Undue hardship in relation to student loans has been measured with the Brunner test. This meant showing:

  • The debtor can’t maintain a “minimal” standard of living due to the debts
  • This issue will remain throughout much of the loan period
  • The debtor did make a good-faith effort to repay the loan

If your situation met these thresholds, then it was possible to see your student loan debt wiped away. However, in the vast majority of cases, judges found the cases fell short.

Signs of change?

Even with the loan company’s appeal, the case involving the Navy veteran is a high-profile sign things may be changing. There has been quiet evidence of a thaw in recent years, however.

One researcher told NPR that 99% of the time, people that file bankruptcy simply don’t try to have student loan debt discharged. But in cases where the debtor does, they got at least some relief from student loans about 40-50% of the time.

This indicates there may be judges out there willing to listen, regardless of long-held beliefs. However, if you’re considering filing bankruptcy with the hope of wiping away student loan debt, it’s very important to speak with an attorney beforehand. Not every judge will view things the same way, and there are risks involved.

Still, in some situations it may be worth exploring the option. Just don’t allow an eye-catching headline to lead you astray.