Can Someone File for Bankruptcy on Their Student Loan Debts in the USA If They Have No Job or Income?

Yes, in certain circumstances, an individual without a job or income may file for bankruptcy and potentially have their student loan debts discharged. However, the path is far from straightforward, and the hurdles are substantial.

Overview of Student Loan Discharge in Bankruptcy

The ability to discharge student loan debts through bankruptcy in the United States is limited. The automatic stay provided by bankruptcy can halt collection actions, but discharging the debt itself is not automatic. Instead, you must file a separate petition and prove that repayment of the debt would impose an undue hardship on you and your dependents.

Requirements for Discharging Student Loans

Unschlach Test and Brunner Test

Most courts use the Brunner test, which requires the following three criteria:

The debtor cannot maintain a “minimal” standard of living for the debtor and the debtor's dependents if forced to repay the student loans. Additional circumstances exist indicating a sustained state of affairs where the debtor cannot maintain a livable standard for a significant portion of the repayment period. The debtor has made good faith efforts to repay the loans.

While some courts have begun to question whether the Unschlach test or the Williams-Humphrey test should be used instead, the Brunner test remains the most common.

Examples of Successful and Unsuccessful Cases

The outcome of student loan discharge cases can vary widely based on the individual circumstances. Here are a couple of examples:

Success Case: Elderly Telemarketer

A 50-year-old telemarketer earning $8.50/hour was granted a discharge due to insufficient income to pay the loans and maintain a minimal standard of living. The court found that the borrower was at the limit of their earning capacity, could not support minimum family expenses, and was trapped in a “cycle of poverty.”

Unsuccess Case: College-Educated Couple

Another case involved a college-educated married couple who worked in low-paying jobs but had income barely above the poverty line. While their expenses included $100 for private school tuition for their daughter, the court found that their efforts to improve their financial situation showed a lack of good faith and denied their discharge request.

Strategies for Discharging Student Loan Debts

While bankruptcy may seem the only option, there are several strategies before and during the bankruptcy process:

Adversary Proceeding

To request a determination of undue hardship, you must file an adversary proceeding. This process involves proving that you meet the Brunner test, requiring extensive documentation and legal representation.

Chapter 13 Bankruptcy

Chapter 13 allows you to propose a repayment plan that could provide structured relief. While you may not be able to discharge the debt completely, it can stop collection actions and create a reorganized payment plan.

Important Considerations

Bankruptcy filings can significantly impact your credit score and remain on your record for up to 10 years. Additionally, costs associated with filing and potential procedural hurdles must be considered.

Conclusion

Filing for bankruptcy to discharge student loans is a complex and challenging process. Consult with a legal professional to understand the specific steps and legal requirements involved. While it may not be feasible for everyone, it could be a viable option for those facing overwhelming debt with no immediate resolution in sight.