By: chris skinner October 30, 2024

Can You Eliminate Student Loans with an Orange County Bankruptcy?

Are Your Student Loan Debts Posing an Undue Hardship?

The “undue hardship” standard comes from11 USC § 523(a)(8). Judges don’t have discretion to discharge your debts—instead, they must find your loans pose an undue hardship as identified by the law.

But what does that mean?

First, you’ll need to file an adversary proceeding within bankruptcy. Make sure you hire a lawyer who knows how to do that. As the debtor, you have the burden of proving the hardship.

Second, California is part of the federal Ninth Circuit, which follows something called the “Brunner test” when it comes to defining undue hardship. This test has three parts, which we look at below.

You Cannot Maintain a Minimal Standard of Living

This is the first piece a student loan borrower must prove: that your student loans are making it hard to maintain a minimal standard of living. Let’s look at your income and expenses.

Some people wrongly think the law requires that they be below the poverty threshold. That’s not true (although it would certainly help strengthen your case if that were true). Instead, we need to look at your expenses, such as your rent, medical needs, utilities, and so on. We then compare your expenses to your income. Can you live comfortably? Or are you unable to get by without taking on more debt?

You might have an advantage living in Orange County, which is an expensive place to live. High rent is certainly a fact of life for many residents.

Your Hardship is Likely to Last for Many Years

Some people have a temporary difficulty supporting themselves. You might lose your job as part of a recession. Nonetheless, most people can get back to work after a brief stretch of unemployment.

To satisfy the test for undue hardship, you need to prove your hardship is likely to last for many years. A permanent disability is one way to qualify. If you are paralyzed from the neck down, then it’s unlikely you’ll soon return to the job market. The same is true if you have a mental illness which prevents you from working.

Disability is not the only way to show the necessary duration of hardship, however. You might also be over age 65, which is the typical retirement age.

For some people, showing extended unemployment—say, 5 years out of the past 10—might be sufficient to meet the durational requirement.

You Made a Good Faith Effort to Repay the Student Loans

Lastly, you cannot discharge your student loans unless you show a good faith effort to repay them. Essentially, the court needs to see you did not blow off your loans but instead acted responsibly.

Some factors which show you are being responsible include:

Making regular payments on the debt, or
Applying for an Income Driven Repayment (IDR) plan, or
Applying for a federal consolidation loan, or
Working with the Department of Education to address your student loan debt.
This is not an exhaustive list of factors. Call Resolve Law Firm so we can review. We can help you document that you have taken your student loans seriously. This element requires good faith but it doesn’t require that you have paid back any specific percentage of debt.

So…Can You Get Rid of Student Loan Debts in Bankruptcy?

The short answer is, “It depends.” Once upon a time, lawyers simply said, “No, it’s impossible.” But the federal government has made it easier to pass the Brunner test. More people are getting student loans discharged in bankruptcy after bringing an adversary proceeding. The only way to find out if this is an option for you is to meet with an attorney and review the facts.

Should You File for Bankruptcy Even if You Can’t Eliminate Student Loans?

For many people, their student loans represent most of their debt. If they can’t eliminate the loans, then they wonder if filing for bankruptcy is even worth it.

To answer this question, we need to know more about your debts. You might also be swamped with credit card debt, spending hundreds of dollars each month just to keep your head above water. Imagine if you can eliminate this credit card debt. That frees up hundreds of dollars each month to pay toward your student loan debt. That might make sense.

Other crushing debts include personal loans and medical debt. Once you eliminate them, you have achieved some breathing room. You can funnel all extra income into your student loans, possibly paying them off faster.

These are some of the important considerations. On the other hand, you might not file right now because you could lose assets in a Chapter 7.

Call Us to Review Your Options

Whether to file for bankruptcy is a major life choice. No one should rush to the courthouse or, on the other hand, simply assume bankruptcy isn’t for them. Make an informed choice by calling Resolve Law Firm. Our Orange County bankruptcy lawyer can take a deeper dive into your financial situation. By asking some targeted questions, we can get a better handle on your current debt load, as well as what assets you own. We can then help you identify the right path toward financial freedom.