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How student loans are dealt with during a bankruptcy

Prior to 1976, Connecticut residents could potentially have their student loans discharged through bankruptcy. In 1976, the law was amended to include student loans that had been in repayment for at least five years. That was later extended to seven years before Congress moved to exclude student loans from most bankruptcy cases. Today, an individual can only have such debt wiped away in bankruptcy if making payments constitutes a hardship.

Most courts use the Brunner test to determine if such a hardship exists. To pass the test, a person would first need to show that he or she couldn't maintain a minimum standard of living because of student loan obligations. Furthermore, it must be shown that the hardship will exist for as long as the debt is outstanding. A borrower must make a good faith effort to make payments even if none are actually made.

Those who can't get their college loans discharged in bankruptcy may have other options to manage their debt. One option may be to look into income-based repayment plans. In some cases, a person may be eligible to pay nothing each month. After 20 or 25 years, any remaining debt balance could be forgiven. This only applies to federal loans, however, and any forgiven debt could be considered taxable income by the IRS.

While eliminating student loans in a bankruptcy may be difficult, it's generally easier to have other debts such as credit card balances or medical bills discharged. This may help an individual come up with the money needed to repay student loans if they aren't discharged. Other benefits of bankruptcy may include an automatic stay of collection activities while a bankruptcy case is still open.

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