Student loan debt is a major issue for recent graduates who are unemployed or underemployed in today’s economy. In Ohio, 68% of college graduates leave school with an average student loan debt of $29,090.00 (statistics courtesy of Student loan servicing companies offer several repayment plans, consolidation, deferment, and forbearance. In addition, student loan borrowers can seek to have their student loans forgiven if they meet certain requirements such as working for the government or a nonprofit organization for 10 years while making payments towards their loans during that time period. These are all good options that I encourage you to look into, but what about student loan borrowers who have defaulted on their student loans already? There are options available.

First: Contact your student loan servicer to see if they’re willing to allow you to start making payments again to bring your student loans out of default. There may be fresh start programs that allow a student loan borrower to make payments during a probationary period. Once that time ends, then the borrower could be allowed to use one of the options mentioned above. BEWARE of third party companies offering student loan debt relief. These companies charge high fees for options that you can do yourself by directly contacting the student loan servicer.

Second: Discuss your student loans and financial situation with a bankruptcy attorney. While the common consensus is that student loans are not dischargeable in bankruptcy, Chapter 13 is an invaluable tool that could bring your student loans out of default. In a Chapter 13 bankruptcy, you make affordable monthly payments for 3 to 5 years based on your income and expenses. The difference between your monthly income and expenses is your disposable income that funds your Chapter 13 plan and is used to pay your unsecured creditors such as student loans, credit cards, and medical debts. Chapter 13 will allow you to repay on your student loans, bring the student loans out of default, and stop collection actions against you while in the Chapter 13 plan. Any remaining unsecured debt will be discharged after your Chapter 13 plan is completed except for the remaining balance of your student loan. At that time and without the burden of your other unsecured debt payments, you could enter into a repayment plan for your student loans that are now out of default. The Chapter 13 plan payment will be a single, monthly payment that simplifies your financial situation.

To discharge student loans in a Chapter 7 Bankruptcy (or at the end of your Chapter 13 plan), you must successfully prove undue hardship. The Sixth Circuit, which has jurisdiction over Michigan, Ohio, Kentucky, and Tennessee, has adopted the three part test in Brunner v. New York State Higher Education Services Corp., 831 F.2d 395 (2nd Cir. 1987) for determining what constitutes an undue hardship. See Barrett v. Educ. Credit Mgmt. Corp. (In re Barrett), 487 F.3d 353, 359 (6th Cir. 2007).

Under the Brunner test, a debtor must establish by a preponderance of the evidence:

1. that the debtor cannot maintain, based on current income and expenses, a “minimal”
standard of living… if forced to repay the loans;

2. that additional circumstances exist indicating that this state of affairs is likely to
persist for a significant portion of the repayment period of the student loans; and

3. that the debtor has made good faith efforts to repay the loans.

These burdens are difficult to meet and require an adversarial proceeding against the student loan company in bankruptcy court. Although it is difficult, it is not impossible. Whether your student loans are dischargeable in bankruptcy is something that you should discuss with a bankruptcy attorney. If you meet the standard and can discharge your student loans, it would greatly alleviate your financial hardships.

If you have any questions, comments, or concerns, please feel free to post a comment or communicate directly to me. As always, this information is not legal advice and acceptance of it does not constitute an attorney-client relationship. If you wish to learn more about how bankruptcy could work for you, please contact me.