Study: People mistakenly leave student loans off bankruptcy filings

Though it is not a given, student loan debt discharge is possible for people living in Florida.

Many people in Florida may believe that student loans are not dischargeable through bankruptcy. This is unfortunate, as this type of debt is one of the most burdensome. According to The Institute for College Access & Success, seniors graduating a four-year public or private institution in Florida have, on average, $24,947 in outstanding student loan debt.

It is important to understand how to address this hardship. As one recent study shows, not enough people are aware of their options.

The research

A study published in the American Bankruptcy Law Journal in 2012 sought to determine the relationship between bankruptcy and how and when student loan debt is discharged. Researchers reviewed 207 cases in which people sought discharges, taking into account those who received no, partial and total student loan debt elimination.

One key finding is that nearly 40 percent of the people who applied for a discharge under the undue hardship standard were granted it. The people who were successful in their endeavor stood out due to the following characteristics:

  • They were more likely to have a hardship that is medical.
  • They were less likely to have a job.
  • They were more likely to have less income the year prior to seeking a bankruptcy discharge.

Perhaps one of the most astounding results of the study is that only 0.1 percent of people who have student loan debt and file for bankruptcy even try to get it discharged. The author states that this could occur because debtors believe that bankruptcy does not cover student loans, which is simply untrue.

Student loans in bankruptcy

The truth is that it is possible for some people to eliminate student loan debt through the bankruptcy process, whether filing for Chapter 7 or Chapter 13. However, as the study points out, the debtor must be able to prove that repaying the loan will create an undue hardship.

Florida courts typically use what is known as the "Brunner Test" to determine whether or not an undue hardship exists. The test involves three components, the first of which is that paying the loan would mean the debtor would not be able to keep up with a minimum standard of living. The second is that the debtor's current financial situation is not temporary and is likely to continue. The last is that the person must have made a good faith effort to repay the loan.

If someone satisfies these three conditions, a student loan discharge may be possible. Or, a judge could use what is known as the totality of the circumstances test, in which all the factors related to paying off the loan will be taken into account.

Anyone who owes money on student loans and is seeking bankruptcy protection in Florida should know their options. People with questions about this issue should speak with an attorney.