The truth of the matter is that student loans, although dischargeable in bankruptcy, are very difficult to discharge in a bankruptcy case. Any bankruptcy debtor with student loans must demonstrate that repayment would impose undue hardship on the debtor and its dependents.
Any debtor who wishes to discharge a student loan in a bankruptcy case must file a separate action known as an adversary proceeding. An adversary proceeding is a lawsuit filed separately from but related to a bankruptcy case. It is an action commenced by a debtor acting as plaintiff filing a complaint against one or more defendants analogous to a civil case.
The Bankruptcy Code does not define undue hardship, which has resulted in bankruptcy courts determining undue hardship by applying a test. One commonly used test is the Brunner test, used for the last three decades. Another is the totality of circumstances test. Some courts use a combination of both. The bottom line was that regardless of the test used, very few debtors were able to prove that the payment of their student loans was an undue hardship to them or their dependents.
The discharge of student loans is a hot topic. Now, after years of Americans being burdened by overwhelming student loan debt, there appears to be hope. Many courts are starting to attack the conventional analysis of Brunner and expressing a willingness to find certain circumstances where student loan debt may be dischargeable in bankruptcy.
A student loan may be fully discharged, which will result in the termination of all collection activity. The loan may be partially discharged, which will require repayment of some portion of the loan. Finally, the loan itself may not be discharged but the terms of the loan may be modified, resulting in a lower interest rate or a longer loan term with lower payments. Talk to an experienced bankruptcy attorney to learn more.
For example, Chief Bankruptcy Judge Cecelia Morris in the Bankruptcy Court for the Southern District of Florida recently reinterpreted Brunner’s “undue hardship” test and discharged over $220,000 in student loan debt.
The Florida court asked the three questions of the Brunner test:
- Based on the debtor’s current income, can he or she maintain a minimal standard of living (Including for the debtor’s dependents) while repaying the student loan debt?
- Is the debtor’s financial situation likely to stay the same for a significant portion of the repayment period of the student loans?
- Has the debtor made a good faith effort to repay the student loans?
The court answered these questions as follows:
- The debtor could not maintain a minimal standard of living,
- the debtor’s financial state of affairs was likely to persist, and
- the debtor had made good faith efforts to repay the loans.
The petitioner had made good faith efforts to repay the loan over the thirteen-year history of the loan. The debtor had even made payments while the loans were in forbearance and no payments were due. Thus, the court allowed the debtor to discharge $220,000 of student loans in bankruptcy. The Florida court made clear that it would no longer propagate the myth (truth) that it was impossible to discharge student loans in bankruptcy. The best may be yet to come for student-loan debtors.
Thus, it is possible to discharge student loan debts in bankruptcy, but knowledge of the requirements is crucial. Consult with an experienced bankruptcy attorney. The Morrison Law Group offers free consultations. Theron Morrison and the Morrison Law Group may help any Utah resident better understand their bankruptcy options. Call 801.456.9933 today to schedule a FREE consultation. We have locations in Ogden, Logan, Sandy, and St. George to serve the residents of the counties of Weber, Cache, Salt Lake, Utah, Morgan, Davis, Washington, and surrounding areas.