I took out a PLUS loan for my son. Can I discharge it in bankruptcy?
You can wipe out a PLUS loan in bankruptcy if you demonstrate undue hardship.
You can discharge a PLUS loan in bankruptcy, but you’ll have to demonstrate to the court that repaying the student loan would cause you and your dependents an undue hardship.
What Is a PLUS Loan?
Many parents take out PLUS loans to help finance their children’s education. (PLUS loans are also available for graduate students to take out on their own.) Parents can take out a PLUS loan for an undergraduate student who is a dependent and who is in school at least half time. With a PLUS loan, the parent is the usually the sole obligor on the loan. This means that the student doesn’t owe the debt, only the parent does.
Discharging Student Loans in Bankruptcy
Student loans can be wiped out in bankruptcy only if you can demonstrate to the court that to repay them would cause undue hardship to you and your dependents. The undue hardship test is not an easy one to meet.
What constitutes undue hardship varies from court to court, although most courts follow the Brunner test, which requires the bankruptcy debtor to meet all of the following three criteria in order to discharge a student loan:
- Poverty. Based upon your current income and expenses, you cannot maintain a minimal standard of living for yourself and your dependents if you are forced to repay your loans.
- Persistence. Your current financial situation is likely to continue for a significant part of the repayment period.
- Good faith. You have made a good faith effort to repay your student loans.
To learn more about the Brunner test, other factors courts consider, and the changing landscape of student loan discharges, visit our Student Loans in Bankruptcy topic area.
The Standard to Discharge a PLUS Loan in Bankruptcy
Unfortunately for parents, the same dischargeability standard for a student loan taken out by a student applies to parents who take out PLUS loans. The fact that the parent has not benefited in any way from the education does not matter. This means that if you have a PLUS loan and you file for bankruptcy, you must demonstrate to the judge that repaying the loan would cause undue hardship to you.
The undue hardship test is not a complete barrier. Courts have found that PLUS loan borrowers met the standard and discharged their loans. In fact, an older PLUS loan borrower may be in a better position than a young student to meet some of the Brunner factors. For example, an older PLUS loan borrower, who perhaps is retired, may have an easier time demonstrating that her financial hardship will last for a significant portion of the loan period (as opposed to a younger recent graduate who has a whole career ahead of her). In the same vein, older PLUS loan borrowers may be more likely to be disabled or physically impaired, limiting their job prospects and future earning capacity.
How to Discharge a PLUS Loan
In most cases, if you want to discharge a PLUS loan in bankruptcy, you should bring a separate action within the bankruptcy case, called a complaint to determine dischargeability. In the complaint you ask the judge to rule that your PLUS loan is dischargeable. The proceeding is like a mini-lawsuit – you can do discovery and present witnesses and/or evidence in court at the hearing on the matter. Student loan creditors usually oppose these types of complaints, so most bankruptcy filers will need an attorney to help.