Are Student Loans Dischargeable in Bankruptcy?
Going Bankrupt May Not Provide Relief from Student Loan Debt
Aug 25, 2009
The main reason most people file for bankruptcy under Chapter 7 is to get out from under their debts. People who qualify for Chapter 7 bankruptcy under the bankruptcy means test are eligible to have their debts discharged, which means that they cannot be held legally responsible for those debts in the future. Not all debts, though, are dischargeable in Chapter 7 bankruptcy.
Student Loans and Bankruptcy
Student loan debt used to be treated as any other debt and could be discharged in Chapter 7 bankruptcy. The 1978 Bankruptcy Reform Act changed that. One of the reforms enacted in the 1978 law provided that educational loans made, insured or guaranteed by the government could not be discharged in bankruptcy without a showing of "undue hardship."
According Stephen P. Parsons, author of The ABCs of Debt, the new bankruptcy laws enacted in the U.S. in 2005 expanded the prohibition on discharge of student loans to include private student loans as well. Under the new bankruptcy laws, an individual's ability to discharge any student loan, whether public or private, depends on whether the person can prove undue hardship.
What does it take to Eliminate Student Loan Debt in Bankruptcy?
The term "undue hardship" was not defined in the Bankruptcy Code, but most bankruptcy courts around the country follow a three-part test first articulated in the case of Brunner v. New York State Higher Edu. Serv. In order to show undue hardship, and get one's student loan debt discharged in bankruptcy, the debtor must prove all of the following:
- Based on current income and expenses, the debtor cannot maintain a "minimal" standard of living for herself and her dependents if forced to repay the student loan debts.
- There are additional circumstances that indicate this state of affairs is likely to persist for a significant portion of the student loan repayment period.
- The debtor has made good faith efforts to repay the loans.
It is Extremely Difficult to get Student Loan Debt Discharged in Bankruptcy
The lesson from the Brunner case is that it is extremely difficult to get student loan debt discharged in bankruptcy. According to Chuck Stewart, Ph.D., author of Bankrupt Your Student Loans, the first prong of the test requires the debtor to show that he or she is "more than simply strapped for cash." It helps if the debtor can show that paying off the loans will place the debtor at or below the poverty level.
For the second prong, the debtor must essentially prove that there is no hope for improving his or her income in the future. If the debtor's financial situation could improve in the future, the student loan debt will not be discharged. Marie Brunner failed this prong because, although she was having some difficulty finding a job after obtaining her Master's Degree, she was not disabled or elderly, for instance, and she had no dependents.
As Stewart notes, the third prong of the Brunner test is in place to prevent people from filing for bankruptcy immediately after graduation and making little or no effort to find employment or make payments on their student loan debt. Marie Brunner filed for bankruptcy within one month of the date her first student loan payment was due. Furthermore, she made no effort to request a student loan deferment prior to filing for bankruptcy.
Student Loan Forbearance and Student Loan Deferment are Less Drastic Remedies
If one's main goal in filing for Chapter 7 bankruptcy is to ease the hardships associated with student loan debt, one should first seek the advice of a bankruptcy attorney or financial expert experienced in counseling debtors about student loan debt. Due to the difficulty of discharging student loan debt in bankruptcy, one might be better off considering other avenues first, including student loan forbearance or student loan deferment.
Sources: Parsons, Stephen P. The ABCs of Debt. N.Y.: Aspen, 2009.
Stewart, Chuck. Bankrupt Your Student Loans (2d ed.). AuthorHouse, 2006.
In re Brunner, 46 B.R. 752 (S.D.N.Y. 1985).
Disclaimer: This article is in no way intended as legal or financial advice. For help with specific legal or financial issues, one should contact a bankruptcy attorney or financial expert in one's local area.
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