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Student loans and bankruptcy

Student loan debt continues to climb, taking a bigger chunk of income as people try to get their finances back on track. Over 40 million Americans carried student loan debt in 2014, up from 29 million in 2008. It emphasizes the growing problem that faces citizens of all ages.

Even as these debts rise, it's extremely rare for bankruptcy cases to dismiss them.

Millennials and Baby Boomers alike

Student loans aren't just a problem for new graduates, for Millennials working through their 20s and 30s. Many parents take out the loans to help their children, but pay an extra price later when life events interrupt the planned payment schedules.

When a young worker is caught in a financial crunch -- either through problematic credit card debt, a medical emergency or an investment gone wrong -- those student loans payments can be the final straw. Similarly, if a parent in their 50s or 60s loses a job, it's nigh impossible to rebuild finances with retirement just around the corner. Few retirement plans included taking on new debt without a source of income.

Undue hardship

Bankruptcy is intended to help a struggling debtor make ends meet, to create a path away from a mounting problem. Loans are restructured, negotiated and often forgiven in a bankruptcy hearing -- all except student loans. A business, home, car or credit card loan is refigured for the new scenario but changing student loans is extremely rare, with only 0.1 percent of those filing bankruptcy even including the loans because it's so unlikely, according to US News & World Report.

The reason dates to a 1978 provision that states student loans can only be forgiven in cases of an undefined "undue hardship." Appellate courts still haven't adopted a standard measurement of the term. Many use the Brunner test (including the Fifth Circuit, which has jurisdiction over Texas), which requires a bleak financial picture of "financial hopelessness" to discharge a student loan. Other districts have used a "totality of circumstances" viewpoint that considers multiple economic factors.

Challenging the status quo

The fact of the matter is that few who claim bankruptcy have the means to challenge the Brunner test and how it defines undue hardship. A high profile case in Boston last year sought a definitive ruling but reached settlement instead.

As US News & World Report notes, many simply don't include student loans in a filing out of the perception that it's impossible. In truth, the report says that many who include student loans see at least some adjustment to their loans. There may not be total forgiveness, but trying may lessen the burden.

Bankruptcy is a bigger picture claim

Life is complex and so are our finances. Many times it's not a single payment that creates a financial black hole, but a combination of different debts and life events. Though there is a myth that loans cannot be discharged, the evidence shows they aren't untouchable.

Bankruptcy is a refresh on a dire situation. With student loans consuming a larger part of personal budgets across the country, it's important that a bankruptcy filing includes the whole picture.

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