Lots of people with student loans file for Chapter 7 or Chapter 13 bankruptcy relief. Even if their educational debts cannot be completely wiped out. Unless the debtor’s situation falls within the undue hardship exception, the bankruptcy discharge order will not get rid of student loan debt.
The basic rule is that student loans are non-dischargeable in bankruptcy. But that’s not the whole story.
In some circumstances, the court will consider modifying student loan terms, reducing the amount owed, or eliminating the principal balance altogether. This could be a tremendous help for you and your family.
What can you do if unable to pay the rent, let alone make payments on a $35,000 or $135,000 student loan? Bankruptcy law provides a narrow opening for individuals genuinely struggling with student loans. This undue hardship exception allows the judge to partly or completely discharge the educational debt or modify the loan terms.
Will the exception apply to you? An adversary proceeding would need to be filed in which you claim and prove you will suffer undue hardship if made to repay the student loan. The judge makes a final determination after the evidence is in. Getting student loans discharged as an undue hardship is difficult but not impossible. By proving undue hardship, the judge could fully or partially discharge an overly burdensome educational loan.
Everything depends upon your specific circumstances. Trust a bankruptcy lawyer with Allegiant Law Group to explain, clearly and honestly, the likelihood of discharging your student loans. Also, that a past bankruptcy did not discharge a student loan does not rule out a determination of undue hardship in a future bankruptcy.
Is It a Student Loan or Something Else?
Not every loan involving school is a non-dischargeable student loan. Bankruptcy law says an “educational benefit loan” is automatically non-dischargeable. Borrowing money for college-related expenses does not necessarily make the debt a non-dischargeable student loan. And it doesn’t matter who signed the loan agreement – parent, student, or both. Deeper inquiry is necessary.
Debts related to buying books, paying lab fees, covering room and board, buying clothes and all the expenses of campus life may or may not be non-dischargeable student loans. For example, an informal loan from grandparent to grandchild “to help with college” is probably an unsecured personal loan, nothing more.
Still, what qualifies as student loan debt has been broadly interpreted by the courts. Whether money is borrowed for undergraduate, graduate, or trade school, educational benefit loans include state and federal insured loans, Direct Subsidized Loans and Direct Unsubsidized Loans, Direct PLUS Loans, Federal Perkins Loans, educational loans through private lenders, and the repayment of stipends and scholarships. Importantly, these borrowers followed a standardized application process with written loan agreements signed by the parties. These are not informal arrangements between family members who seal the agreement with a handshake across the kitchen table.
Proving Undue Hardship to Eliminate Student Loan Debt
How do you prove undue hardship in court? Is there “certainty of hopelessness” because the debtor’s condition is permanent? Generally, the healthy adult who finished graduate school with $150,000 in student loan debt has a problem if not earning enough to reduce the principal. If the same person develops a chronic illness and cannot work, then he or she has an undue hardship situation.
Brunner Test for Undue Hardship
What about the jobless debtor who is not disabled, is not elderly, has no dependents, yet claims a few months unemployment justifies a finding of undue hardship? That will not persuade the bankruptcy court to discharge the student loan. It takes more.
An important student loan analysis came out of the case of Brunner v. NY State Higher Ed. Services Corp., 831 F2d 395 (2d Cir. 1987). The Brunner court applied a three-part test for proving whether undue hardship exists:
“(1) [T]hat the debtor cannot maintain, based on current income and expenses, a ‘minimal’ standard of living for herself and her 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.”
Whether a private, federal, or state student loan, prepare to provide evidence supporting each factor of the Brunner Test.
Student Loan Strategy in Chapter 7 and Chapter 13
With student loans, you need a legal strategy for the best possible outcome. Only when undue hardship is proven can the student loan be discharged.
In Chapter 7 proceedings, student loans fall outside the discharge order. Because most Chapter 7 cases are completed within a year, those student loan payments restart in a matter of months. There is financial relief. With other debts eliminated, remaining student loans are manageable again. Your paycheck will stretch much farther after the bankruptcy discharge than it did before filing.
Given the challenges of proving undue hardship, filing for Chapter 13 may be a better strategy over Chapter 7.
In Chapter 13, the three-year or five-year repayment plan lumps student loans in with all other non-priority unsecured debts. Plan payments are manageably small with a proportional share going to each creditor. Depending upon your disposable income, the monthly plan payment might cover the original student loan installment or merely a percentage of it. Part of the loan could also be forgiven. After the case is closed, the balance owed on the student loan must be paid. Still, you’ve had three to five years to re-adjust your lifestyle. And student loan payments should be easier to handle once those other claims are discharged.
Help with Student Loans Outside the Bankruptcy System
Are you delinquent on a student loan or about to default? Be sure to exhaust all available options within the student loan system. Education loan payments could be deferred. You could obtain an income-driven repayment plan with a modified schedule. Loan forgiveness is possible for borrowers hired by government or not-for-profit organizations. Debt settlement may be possible, too, along with debt cancellation.
If you have student loans, then talk to a caring lawyer who can advise you.