By Dean Lintzeris, Esquire
June 1, 2023
Pursuing a college education is an investment in one's future, often necessitating financial assistance in the form of student loans. However, circumstances may arise where repaying these loans becomes an insurmountable burden, leading borrowers to consider bankruptcy as a potential solution. While discharging student loans in bankruptcy is challenging, it is not impossible. In this comprehensive guide, we will delve into the intricate process of obtaining a student loan discharge in bankruptcy, providing valuable insights and practical advice to help borrowers navigate this complex terrain.
Understanding the Challenge: Non-Dischargeability of Student Loans
By default, student loans are typically not dischargeable in bankruptcy unless borrowers can demonstrate an undue hardship. This means that borrowers must prove to the court that repaying their student loans would cause them significant financial hardship and that this hardship is likely to persist for a significant duration.
Proving Undue Hardship: The Brunner Test
To establish undue hardship, borrowers are often required to satisfy the Brunner test, which is widely used by bankruptcy courts to assess eligibility for student loan discharge. Importantly, the Brunner Test is not used by all bankruptcy courts and has gradually been falling out of favor. Nevertheless, it remains the standard employed by most bankruptcy courts. The Brunner test evaluates three key factors:
1. Standard of Living: Borrowers must demonstrate that under their current financial circumstances, they cannot maintain a minimal standard of living while repaying their loans.
2. Duration: To meet this criterion, borrowers must provide substantial evidence that their financial situation is likely to persist throughout a significant portion of the loan repayment period. This can include factors such as prolonged unemployment, disability, or other exceptional circumstances that hinder the borrower's ability to generate sufficient income to repay the loans.
3. Good Faith: Borrowers must establish that they have acted in good faith regarding their loan obligations. This involves demonstrating an honest effort to repay the loans, such as actively seeking employment, participating in loan rehabilitation programs, or considering alternative repayment options.
Alternatives to the Brunner Test
There have been several recent developments that aim to make it easier for borrowers to discharge their student loans in bankruptcy. For example, in July 2021, in the case Homaidan v. Sallie Mae, Inc., one federal court ruled that under specific circumstances, certain private student loans can be discharged in bankruptcy.
Additionally, in November 2022, the Department of Justice and Department of Education released new guidance that aims to simplify the burdensome process of showing undue hardship and make it easier for government lawyers to recommend to the court that federal student loans be discharged. Under the new guidelines, debtors will complete an “attestation form,” which the government will use to help determine whether to recommend a discharge. If debtors meet certain requirements, government lawyers may recommend a full or partial discharge.
These developments are intended to make the process of discharging student loans in bankruptcy more fair and consistent for people seeking relief on their federal student loans.
Consulting with an Attorney: A Crucial Step
Given the complex nature of bankruptcy law and the intricacies involved in proving undue hardship, seeking guidance from an experienced attorney who specializes in bankruptcy law is highly advisable. A skilled attorney can evaluate your unique financial situation, guide you through the legal process, and represent your interests in court. They will be well-versed in the nuances of student loan discharge cases and can help you compile the necessary documentation, present a compelling case, and navigate potential challenges along the way.
Building a Strong Case: Documenting Undue Hardship
To increase the likelihood of a successful student loan discharge, it is essential to compile thorough and compelling evidence of undue hardship. Some key elements to consider include:
1. Financial Documentation: Gather detailed information about your income, expenses, and debts. This can include pay stubs, tax returns, bank statements, and credit card statements. Document any exceptional circumstances that affect your financial stability, such as medical bills or a disability.
2. Employment and Education Records: Provide evidence of your efforts to secure employment or increase your earning potential. This can include job applications, correspondence with potential employers, and educational records demonstrating your pursuit of additional qualifications.
3. Communication with Loan Servicers: Maintain a record of all communication with your loan servicers, including correspondence, payment history, and any loan modification or rehabilitation efforts you have pursued.
4. Expert Opinions: If applicable, seek professional opinions or assessments that support your claim of undue hardship. This can include medical reports, disability evaluations, or vocational assessments.
Alternative Options: Exploring Repayment Alternatives
While discharging student loans in bankruptcy is a considerable undertaking, it is crucial to consider alternative options before pursuing this route. Several alternatives exist to alleviate the burden of student loan repayment, including:
1. Loan Consolidation: Consolidating multiple loans into a single loan can simplify repayment and potentially reduce monthly payments.
2. Income-Driven Repayment Plans: These plans base monthly payments on the borrower's income and family size, offering more manageable payment options.
3. Loan Forgiveness Programs: Investigate various loan forgiveness programs available to borrowers who meet specific criteria, such as public service employment or working in certain professions.
4. Deferment or Forbearance: Temporarily suspending loan payments through deferment or forbearance may provide temporary relief for borrowers facing financial hardship.
Obtaining a student loan discharge in bankruptcy can be a complex and arduous. While discharging student loans in bankruptcy is not guaranteed, consulting with a knowledgeable bankruptcy attorney and exploring alternative repayment options can provide valuable insights and potential solutions. Remember, each situation is unique, and it is crucial to weigh all available options and seek professional guidance before making any decisions.