Discharging Student Loans in Bankruptcy

First, student loans are generally not dischargeable in bankruptcy. That goes for almost any kind of student loan in any kind of bankruptcy. However, if one can prove that re-paying a student loan is an "undue hardship," then the student loan will be discharged. This is really, really hard.

There are two tests that are used to determine whether a student loan presents an undue hardship under 523(a)(8) of the Bankruptcy Code. The Brunner test requires, as one Court put it:

That the debtor bears the burden of demonstrating by a preponderance of the evidence: "(1) that the debtor cannot maintain, based on current income and expenses, a `minimal' standard of living for [himself] and [his] dependents if forced to repay the loans; (2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and (3) that the debtor has made good faith efforts to repay the loans.

The second test is the "totality of the circumstances" approach. As another Court put it:

The "totality of the circumstances" analysis requires a debtor to prove by a preponderance of evidence that (1) his past, present, and reasonably reliable future financial resources; (2) his and his dependents' reasonably necessary living expenses; and (3) other relevant facts or circumstances unique to the case, prevent him from paying the student loans in question while still maintaining a minimal standard of living, even when aided by a discharge of other pre-petition debts.

And in comparing the two tests:

The only significant difference between these is that under Brunner, the debtor must establish that she made a good faith effort to repay the educational loans at issue. When applying the totality of the circumstances test, the debtor's efforts to repay may be considered, but evidence of those efforts (or lack thereof) is not necessarily dispositive.

The Massachusetts bankruptcy courts tend to use the totality of the circumstances approach, but the Brunner test is quite popular around the country.

Crucial in these undue hardship cases are the future prospects of the debtor. That usually comes down to the nature of their disability or serious medical issue, and the credibility and nature of the expert testimony from the debtor's doctor(s). This is because undue hardship requires that the debtor to demonstrate that her disability will prevent her from working for the foreseeable future (case).

Also critical is the role of the several income-based repayment options available outside of bankruptcy. Courts who view these plans as a good alternative to an undue hardship discharge, ask whether the debtor has tried those. Other judges feel that these plans unfairly hold people hostage who are basically in hopeless situations already (age plays a big part in this). One of the big downsides to income-based repayment plans is that even though any student loan balance is discharged after 25 years, this is a taxable event outside of bankruptcy and can lead to a whole new set of problems.

If you are looking for a lawyer to take an undue hardship discharge case for a student loan, this is a good place to start. You may, of course, also contact us for a student loan meeting and evaluation (there is a fee for this service).