Many people are under the incorrect belief that student loans can’t be wiped out in bankruptcy. However, there are at least two ways to get rid of student loans in a bankruptcy case.
The first is to show the court that a particular loan does not meet the legal definition of “educational loan” under the Bankruptcy Code. We discuss that in another article. The second one is to show that the loan would cause “undue hardship” and so based on that borrower’s specific situation, the loan should be wiped out.
In Minnesota, courts look at three factors to figure out whether a loan causes undue hardship.
The borrower’s past, present and reasonably reliable income and assets;
A calculation of the borrower’s reasonable necessary living expenses for their family; and
Any other relevant facts and circumstances.
This test is applied case-by-case and really depends on how well a borrower can paint the financial picture both that they can’t afford to pay their loans now, and also convince the court they will not be able to pay in the future. It’s helpful to be able to prove some kind of disability or condition that makes it harder to work or makes the stress of student loans too much to bear.
It’s much easier to wipe out private loans than federal loans using the bankruptcy process. Discharging student loans requires that you file bankruptcy first, and then file a separate case, called an adversary proceeding, against the student lender. Typical fees in a student loan discharge case are between $7,500 and $15,000, but they vary case-by-case.
We’re one of the only law firms in Minnesota who handle student loan discharge cases. Get in touch for a free consultation to figure out whether you’ll qualify.