One of the most common questions I get asked is whether student loans can be discharged in bankruptcy. Although, difficult, student loans are dischargeable in bankruptcy. In the past it was extremely hard to get student loans discharged through the bankruptcy courts however, in more recent years it seems like the shift is beginning to change.
The aggregate student loan debt owed by borrowers in the United States has increased over time. According to the U.S. Department of Education, the price of college tuition has doubled over the past three decades. At the end of 2017, student loan debt reached a whopping $1.37 trillion. Student loans are now the second highest consumer debt category – behind mortgages. As student loan indebtedness increases, many borrowers are unable to repay their student loans.
The Bankruptcy Reform Act
Prior to 1978, student loans were dischargeable in bankruptcy. The Bankruptcy Reform Act of 1978 changed the bankruptcy code making it more difficult for borrowers to be able to discharge their student loans. Many wanted to ensure that the student loan programs would be kept intact so, they believed the only way to do this was to prevent student loans from being dischargeable. Further, supporters of the act believed that there was no way to “repossess” what the student loans were used for thus, eliminating the dischargeability of student loans in bankruptcy would be the only way to solve that issue. As time went on their were different amendments made to the Bankruptcy Reform Act to make it even harder for students to be able to discharge their student loans.
How to Discharge Student Loans Today
In order to get your student loans discharged in bankruptcy you must show that the payment will impose an undue hardship on you and your dependents. The bankruptcy code fails to distinguish what an “undue hardship is” thus, courts have used different trusts to evaluate whether a particular borrower has shown an undue hardship.
The most common test, and the one used in both New York and New Jersey is the Brunner test. The Brunner test requires a showing that 1) the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for the debtor and the debtor’s dependants if forced to repay the loans; 2) 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) the debtor has made good faith efforts to repay the loans ( Brunner v. New York State Higher Educ. Servus. Corp., 831 F. 2d 395 (2d Cir. 1987).
It is ultimately up to the court to decide if you have met the undue burden test but If you can prove all of the prongs your student loans will be discharged.
Let’s look at some cases where Students loans have been discharged in Bankruptcy:
- The bankruptcy court approved discharging student loans where the debtor established he could not maintain a decent standard of living for him and his children if forced to pay back the loans.
- The bankruptcy court approved discharging a student loan where the debtor had made good faith efforts to obtain employment, maximize income and minimize expenses.
- The bankruptcy court approved discharging the student loan for a debtor who only made $8.50 a week as a telemarketer thus, did not earn enough to pay the loans and would be trapped in a cycle of poverty.
- The bankruptcy court granted a discharges where the borrower attended a fraudulent school.
- The bankruptcy court approved a discharge where the debtor only worked part time and would not be able to gain employment to make more. Although, he was on an income-based repayment plan the court ruled that even though the debtors repayment plan is zero under the income based repayment plan, the first prong of Brunner simply requires the debtor only show they cannot repay the loans and maintain a minimal standard of living.
How to Discharge Your Student Loan in Bankruptcy
In order to discharge your student loan in bankruptcy you must file a petition called an adversary proceeding. An adversary proceeding is a lawsuit that is commenced within the bankruptcy court. In order to file an adversary proceeding you would file a complaint and submit evidence to prove why your student loan should be discharged.
What Kind Of Proof Will I Need to Show to Get my Student Loans Discharged?
Aside from paystubs, bank statements and a detailed report of your household expenses you will have to show documentation that you tried to repay your debt and worked with you loan servicer. Thus, you will have to gather all of your statements that show that you made your monthly loan payments. In addition, you will have to show any evidence relating to job loss or not be able to find future employment. In some circumstances, you may need to hire an expert witness to testify on your behalf.
What Should I do If I want to Move Forward?
You should consult with an attorney to see if filing for bankruptcy is the right decision for you. An experienced bankruptcy attorney can review your case and determine the likelihood of being able to get your student loans discharged. Our experienced attorneys can help you. Call us today for a free consultation.