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How student loans are treated in bankruptcy

As a general rule, Massachusetts residents with student loan debt cannot have their balances discharged in bankruptcy. The reason is that there was a fear that students would try to have their debts discharged after receiving their degrees. However, if a person passes the "Brunner Test," a student loan balance may be wiped away in bankruptcy.

This test has three components, including the presence of a hardship if the debtor is required to make future payments. Furthermore, the hardship would have to last for the foreseeable future, and the debtor has to show a good faith effort to pay the balance owed. While the standard for a debtor to rid themselves of student loan debt is still high, judges are starting to become more sympathetic. More bankruptcy judges are also open to the idea of eliminating tax bills related to any amounts forgiven through federal programs.

While student loan debts are rarely discharged today, this was not always the case. Prior to 1976, money borrowed for educational purposes could be eliminated in bankruptcy. Congress modified the rule over time to allow discharge only after the loans had gone through at least five years of repayment. Further modifications to bankruptcy laws in 1998 and 2005 created even tighter restrictions.

Those who are in need of debt relief may find it by filing for Chapter 7 bankruptcy. Doing so could make it possible to have most debts eliminated without paying anything to creditors. Depending on a debtor's financial state, student loan payments may also be included as a debt eligible to be discharged. An attorney could talk more about the Brunner Test and how it may impact a student loan during a bankruptcy case.

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