Student Loans in Bankruptcy
Bankruptcy is not kind to student loan borrowers. Many recent graduates have been saddled with outrageous student loan debt and cast into a poor job market. Some unfortunate borrowers come into my office desperate for relief from their student loans, only to be disappointed by the lack of relief bankruptcy can offer. I must tell these dejected borrowers that Congress has failed to respond to the student loan crisis by updating the section of the bankruptcy code that makes student loan debt nondischargeable. Under 11 USC §523(a)(8) student loans are excepted from discharge unless nondischargeability would impose an undue hardship on the debtor. The policy underlying the section is to prevent recent graduates from abusing the bankruptcy system by opportunistically discharging student loan debt upon graduation. However, despite the plausible integrity of that policy, the effect of §523(a)(8) has been to except overwhelming student loan debt from discharge in bankruptcy, leaving honest but unfortunate student loan debtors with few options and fewer avenues by which to achieve a fresh start.
What Qualifies as a Student Loan?
Unfortunately the definition of a student loan is quite broad in the bankruptcy context. Nondischargeable student loans include (1) educational loans made, insured, or guaranteed by a governmental unit, or made by a program wholly or partially funded by a governmental unit; (2) any obligation to repay funds received as part of an educational benefit, stipend or scholarship; and (3) debts for any qualified educational loan, meaning debts incurred to pay higher education expenses for the debtor, spouse, or dependent.
The Undue Hardship Exception
Many student loan debtors hinge their bankruptcy hopes on the undue hardship exception, only to discover that the undue hardship exception is not easy to qualify for. (If you need to determine whether you student loans can be discharged in chapter 7 bankruptcy visit www.santarosabankruptcy.us and speak with our bankruptcy attorney). To discharge all or a portion of your student loans under the undue hardship exception you must pass what is known as the Brunner test. The Brunner test is a 3 prong test which owes its name to the case Brunner v. New York. Under the Brunner test the debtor must prove by a preponderance of the evidence (more than 50% likelihood; more likely than not) that:
- Based on current income and expenses the debtor cannot maintain a minimal standard of living for the debtor or his or her dependents if forced to repay the loan
- Additional circumstances exist showing that the state of affairs is likely to continue for a significant portion of the repayment period; and
- The debtor has made a good faith effort to repay the student loan
Prong #1 – Cannot Maintain a Minimal Standard of Living
To be unable to maintain a minimal standard of living requires an evaluation of monthly income and expenses. To begin, the court will look to the debtor’s average current income and expenses. If the debtor has an income producing spouse or domestic partner the court will include their income in the analysis in order to capture the total picture of the debtor’s household finances. After the debtor’s total household income has been established the court will deduct monthly expenses. For the debtor to satisfy this prong the resulting figure does not need to be below the poverty line, but must be low enough to evidence an inability to maintain a minimal standard of living if repayment were required. Furthermore, satisfying the prong requires that it be truly unconscionable to require the debtor to reduce expenses further, or increase income in order to make student loan payments.
Prong #2 – Additional Circumstances, Financial Condition Is Likely To Continue
To satisfy the Brunner test and discharge all or a portion of student loans in bankruptcy, the debtor must prove by a preponderance of the evidence that there are additional circumstances showing that their present financial situation is likely to continue for a significant portion of the student loan repayment period. Therefore, it is not enough to simply show that you cannot currently make student loan payments; you must show an insurmountable barrier that will prevent you from repaying your loans for a significant portion of the repayment period. It is not required that you show a serious disability such as paralysis, but there must be exceptional circumstances that strongly suggest your inability to repay your student loans for a significant portion of the repayment period. Exceptional circumstances may include, but are not limited to, physical injury, unmarketable skills, dependent care obligations, advanced age, or mental illness.
Prong #3 – Good Faith Effort To Repay
To satisfy the Brunner test you must show a good faith effort to repay your student loans. Evidence of good faith include attempts to modify the student loan repayment plan to facilitate repayment, minimizing expenses, and length of time between graduation and bankruptcy.
The Silver Lining
The test itself may sound impossible to satisfy, and for many student loan borrowers it is. However, there is a silver lining: the bankruptcy court can partially discharge student loan debt as long as the portion of the debt to be discharged satisfies all 3 prongs of the undue hardship test. Consequently, discharging student loan debt is not a 100% or nothing proposition. It is possible that it would be an undue hardship to repay a percentage of your student loans; to which, that percentage of student loan debt can be discharged in bankruptcy.