Student loans have become a huge burden in the United States. Recent statistics show that current outstanding student loan debt is more than $1.1 Trillion. That is “Trillion” with a “T.” We can point our fingers in many directions to cast the blame for this high number, including lenders, borrowers, schools, and the federal government, but we will save that for another day and another article. In this post, we will address the basic question of whether you can get a discharge of educational loans (or student loans) by filing a Bankruptcy case. The short answer is that under current law it is very difficult, but not impossible, to get a discharge of student loans, whether public of private, in a Bankruptcy case.
First, lets address the basic question of what is an educational or student loan. Although there are occasionally cases that require more analysis, it is normally clear when a loan falls in this category. It includes Stafford Loans, Supplemental Student Loans, Pell Grants, and other obligations to repay funds received as “educational benefits, scholarships or stipends” (see Section 523(a)(8) of the Bankruptcy Code). The obligation may be to a public (ie, government) entity or a private lender, and some Courts have held that even debts owed to private middle schools come within the statute. It does not always include a debt owed to a school — for example, a debt owed for overdue tuition or to the bookstore may be a dischargeable debt.
Assuming the obligation is determined to be an educational loan that is presumed to be non-dischargeable, what does it take to overcome that presumption so that it is discharged in a Bankruptcy case? The short answer is that it is extremely difficult. Most courts follow some form of the “Brunner Test” (named for a 1987 case), which requires a showing that: (1)… 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) … 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. Many courts have commented that this test requires a “certainty of hopelessness” and that loans will be discharged only in the “most dire circumstances.” What does this mean? Essentially, it means that a debtor must show that they have a disability or other hardship such that they will have virtually no chance of earning anything more than it takes to pay their bare living expenses during their working life. Unemployment, even for long periods of time, is not sufficient. A “minimal” standard of living means below the poverty level and not just mere inability to pay the debts. In most, but not all, courts there is no middle ground or a partial discharge of educational debts – they are either all dischargeable or all non-dischargeable.
If you have crippling student loan debt, all hope is not lost. First and foremost, if you are considering Bankruptcy make sure that you put the student loan situation on the agenda for the initial consultation or a follow-up meeting with a Bankruptcy lawyer. A recent study by Jason Iuliano reveals that many borrowers may be eligible for a discharge if they would just pursue it, and the pursuit of discharge may lead to a favorable settlement. There are also programs available to defer repayment or to reduce the principal balance. If Bankruptcy is an option because of your overall financial situation, a discharge of other debts may free up funds to pay the student loans. Although we have to be realistic about the high bar in discharging student loans in Bankruptcy, you really will not know until your situation is reviewed by a lawyer familiar with the cases in your state.