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Will Bankruptcy discharge your Colorado student loan Debt?

The short answer is probably not.   But it’s possible.

According to one study, only 0.1% of student loan borrowers declaring bankruptcy attempt to get their student loans discharged. Of that number, 40% succeed. In other words, just 0.04% of people who have filed for bankruptcy and sought to have their loans discharged received either a full or partial discharge of their student loans.

And that 40% had a really rough life going into bankruptcy to meet the requirements for discharging student loans.  Its like the car accident victim who gets a good check from the insurance company.  That’s the good news.  The bad news—he’s probably in constant pain.

Likewise, if you can prove you suffer from an “undue hardship,” your problems are not limited to student loan debt.

What qualifies as ‘undue hardship’?

The code does not say what “undue hardship” is?  Congress left that to the judges to figure out.

And this moves us along to the infamous “Brunner Test.”

The Brunner test comes from a case called …Brunner.  And in that case, the court came up with a formula that may courts have followed over decades.  It goes like this. 

Under the Brunner test, the debtor must prove three things.

  1. “He or she cannot maintain, based on current income and expenses, a minimal standard of living for himself or herself and any dependents if forced to repay the loans.”
  2. “Additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans.”
  3. “He or she has made good faith efforts to repay the loans.”

Unfortunately, these Brunner standards came from a time when student loans were small—$5000 or so.  And this Brunner test has created years and years of consternation.

And getting rid of student loans means suing.  Which costs money.  Thousands of dollars.  Because the government always puts up a fight.

I’ll cut to the chase. 

Unless you have a winning case, it’s not worth suing.  And a winning case often means you have an almost impossible situation.  Barely surviving, which is not going to change, a chronic illness.

It sucks, but this is reality.  If the student loan creditors are coming after you, the best bet is to file chapter 13.  That will give you a 5-year reprieve where the student loan creditors cannot pursue you.  You are not getting rid of the student loans, but you get a break for half a decade.

If discharging student loan debt in bankruptcy isn’t a realistic option for you, don’t give up hope. There are other options that could give you some relief from these debts.

What can you do if discharging the student loans is not an option?

1. Income-driven repayment plan

If you have federal student loans, you can apply for an income-driven repayment, or IDR, plan to get a lower monthly payment.

Under these plans, the loan servicer—usually a bank– extends your repayment term to 20 to 25 years and caps your payments at a percentage of your discretionary income. There are four IDR plans — Income-Based Repayment, Income-Contingent Repayment, Pay As You Earn and Revised Pay As You Earn — with differences based on eligibility and the terms of payment.

According to Federal Student Aid, an office of the U.S. Department of Education, most borrowers will qualify for at least one IDR plan. Some borrowers will qualify for payments as low as $0, which could give you significant financial relief from your loans. With a $0 payment, borrowers only have to make payments on their loans if their income changes.

You can use the federal Repayment Estimator to calculate how much your payment would be under each of the four plans. You can also apply for an IDR plan online.

2. Deferment or forbearance

If you’re going through a temporary financial hardship, such as a job loss, you may be able to postpone making your payments with a deferment or forbearance.

All federal loans are eligible for both deferment and forbearance.

  • Deferment: If you have certain kinds of federal loans, you can temporarily stop making payments. During a deferment for certain loans, you may not have to pay the cost of interest that accrues on your loan while your loans are in deferment.
  • Forbearance: With a forbearance, you can postpone making payments for up to 12 months at a time. Unlike a deferment, you must pay the accrued interest after this period ends.

Not all private loan lenders offer deferments or forbearance, but some allow you to temporarily halt payments or make interest-only payments for a few months. 

3. Loan discharge because of disability

If you are disabled, you may be able to get your loans discharged without having to go through bankruptcy proceedings.

With certain federal loans, Total and Permanent Disability Discharge is available to those who are totally and permanently disabled. If you’re eligible, the loan servicer can forgive the total remaining balance of your loans. For more information and how to apply, visit DisabilityDischarge.com.

Although not all private loan lenders offer discharges in the case of disability, some do. For example, College Ave will forgive the remaining balance if the borrower becomes permanently disabled.

If you have a disability and want to apply for a loan discharge, contact your lender directly via the customer service department. Explain your situation and what has changed since you took out the loans and ask if the lender offers loan discharges in the case of disability.

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