One of the most common questions I am asked about bankruptcy is, “Can I discharge and get rid of my student loans”?
The current bankruptcy law specifically excludes certain types of debt from being discharged in bankruptcy. One of the types of debt that is currently excluded from discharge is student loans, in most circumstances. The current bankruptcy law does allow for discharge of student loans if the person filing can show “undue hardship.”
In order to show “undue hardship,” a person basically has to prove to the bankruptcy court that he or she will never be able to repay the loan without causing hardship to him or herself and his or her dependents. People who are commonly successful in discharging student loans due to undue hardship are those who are disabled or who can prove they will never make enough money to make the necessary payments on the student loans. Most courts use a test developed by the Federal Second Circuit Court of Appeals, commonly known as the “Bruner” test. Under this test, the debtor or consumer has to show:
- The debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for the debtor and the debtor’s dependents if forced to repay the student loans;
- 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
- The debtor has made good-faith efforts to repay the loans.
(Brunner v. New York State Higher Educ. Servs. Corp., 831 F. 2d 395 (2d Cir. 1987).
Some courts will not apply such a rigid test, but most do, and it is very difficult to meet the test. Debtors are usually better off, when dealing with student loans, contacting the student loan company directly to make alternative payment arrangements or ask for forbearance, deferment or other hardship payment solutions. Student loan companies are often very cooperative in finding a solution that allows the consumer to stay on track with repaying his or her student loans. However, even with the repayment programs available, student loans have a high default rate.
According to recent studies, there is an estimated $730 billion of outstanding student loan debt, and only 40 percent of it is being actively repaid. The remaining 60 percent of outstanding student loan debt is in default, meaning payments are not being made, are in deferment (payments are not being made and interest is not accruing) or are in forbearance (payments are not being made, and interest is accruing). The high default rates and resulting issues for consumers have inspired some lawmakers to take action.
New legislation was introduced in the House and Senate this month that would make it easier for consumers to discharge student loan debt through bankruptcy. The legislation removes the requirement to show “undue hardship,” but does so for private student loans only. Private student loans are owed to private, for-profit entities and differ from government-backed student loans. Case law on this matter has defined “for-profit” entities as banks, credit unions, truck driving schools, trade schools, private colleges, etc.
Proponents of the legislation believe it could provide much-needed relief from high private loan balances and their related high interest rates. Opponents of the legislation believe it will adversely affect more people than it will help, as other private student loan borrowers’ interest rates will increase to offset the numerous losses that will be incurred by the private lenders or entities.
The outcome of this debate and the proposed legislation remains to be seen. Of course, student loans are only one subject on which to receive advice when someone is considering filing for bankruptcy. As always, consumers with questions about student loans and bankruptcy should consult a licensed bankruptcy attorney in their state.
Lauren Timmerman is an associate with the firm, with a primary practice in bankruptcy. She graduated magna cum laude with her bachelor’s of arts from Wayne State University in Detroit, Michigan, where she was a member of Phi Beta Kappa, Golden Key Honor Society and Phi Eta Sigma Honor Society. Lauren then continued on at Wayne State to receive her law degree. During law school, she served as managing editor of the “Journal of Law in Society,” and won numerous awards for brief writing and oral argument in moot court competitions. After receiving her Juris Doctor, Lauren worked with the firm of Deloitte & Touche, LLP, advising large-scale corporate clients and high-net worth individuals on tax and financial issues, including financial planning proposals and reviewing corporate, trust and individual tax returns. She then moved to the firm of Hammerschmidt, Stickradt & Associates, PLLC, where she primarily practiced bankruptcy law. She continued her focus on bankruptcy cases in her work at Marrs & Terry, PLLC, where she managed satellite offices in addition to her representation of debtor and creditor clients. Lauren also served as a managing attorney in bankruptcy at Schneiderman & Sherman, PC, where she managed creditor-based bankruptcy and loss mitigation practices for nationwide clients.
Lauren is a member of the State Bar of Michigan and is admitted to practice in the U.S. District Courts for the Eastern District of Michigan, the Western District of Michigan, the Eastern District of Texas and the Northern District of Texas. Lauren is not yet admitted to the State Bar of Texas. Her admission to the State Bar of Texas is pending.