Most college students graduate from their universities with a significant amount of student loan debt. Many consider this a necessary part of pursuing higher education. But, if these students experience financial woes after graduation and file for bankruptcy, there is a good chance they will not see their student loans discharged with their other debt.

People who filed for bankruptcy used to be able to discharge their student loan debt along with credit card debt, automobile loans and other forms of indebtedness. But Congress changed this law in 1976 after a few new professionals, such as doctors and lawyers, filed bankruptcy. The laws became more severe in 1990 and 1998. By 2005, Congress had ruled that even for-profit lenders would have the same protection from discharge that applies to government-backed loans.

Under these strict laws, debtors may only discharge their student loans if they can prove that making payments would cause them “undue hardship.” Essentially, their financial future has to be considered hopeless without the removal of the debt. However, it has been difficult for bankruptcy judges to define exactly what “hopeless” really means.

Most bankruptcy judges use what is called the Brunner test. The test is named for a case that displayed a three-item checklist for judges to use when attempting to rule whether student loan debt should be wiped away.

First, the judge looks at whether the debtor has made an effort to repay their loans. Then, the judge will examine the debtor’s budget to allow for a basic standard of living expenses. Finally, the judge will consider what the debtor’s financial future looks like during the loan repayment period. The third item is often uncomfortable for judges since it calls on them to speculate about the debtor’s future.

Despite the challenges that many people face in paying off their student loans, few people attempt to discharge this debt. Still, this doesn’t mean that people who are struggling with student loan debt don’t have other options. For example, debtors might be able to discharge other obligations in bankruptcy, leaving them with the means necessary to make their student loan payments. It is always a good idea for debtors to talk to a bankruptcy attorney who can help them figure out their options.

Source: The New York Times, “Last Plea on School Loans: Proving a Hopeless Future,” Ron Lieber, August 31, 2012.

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