The idea of discharging student loan debt through a bankruptcy has always been assumed that it is not allowed. It is because of this assumption, 99.9 percent of people who have student loans debt and are in bankruptcy proceedings do not even attempt to get the loans discharged. In actuality, a 2013 court case set precedence for partially discharging student loans. In the case of Brunner v. New York State Higher Educ. Servs. Corp., 831 F. 2d 395 (2nd Cir. 1987), the plaintiff proved to the courts that his student loans created an absolute “undue hardship”. This is now referred to as the “Brunner Test”. Most Courts will use this test.
Jason Iuliano, a Princeton student in political science PhD program, and with a degree from Harvard Law School, did a student loan bankruptcy study and discovered nearly 40 percent of bankruptcy filers with student loan debt who did request the discharge were approved. Not to say it is an easy undertaking, even filing for a bankruptcy can require much patience, and money. Yet, if in truth, financial hardship is a stronghold, this can be proven to the courts by filing a separate lawsuit within the bankruptcy declaration.
The process begins with the filing for Chapter 7 or 13 bankruptcies. Typically, for a few hundred dollars a dedicated bankruptcy law firm can do this, as it is quite frustrating taking on the paperwork involved. The court will initially deny the request for student loan discharge in the bankruptcy filing, and a separate filing for an adversary proceeding needs to be done for a determination .Be prepared, this will be a court battle and the loan holders can and will fight back.
The Brunner test is the measure to weigh whether or not an undue hardship exists enough for the student loan discharge. It is based on these three areas:
- The debtor cannot maintain a minimal standard of living based on current income and expenses. This includes the debtor’s dependents being forced to repay the student loans as well.
- There are circumstances which will persist for a significant portion of the repayment of the student loans.
- The debtor has made good faith efforts to repay the loans before the bankruptcy proceedings began.
Another outcome in a Chapter 7 or 13 bankruptcies could be short term relief from student loan debt with reduced monthly payments. The remaining loan balance after the bankruptcy repayment period still remains in effect though. A Chapter 13 bankruptcy is referred to as‘reorganization’. This means a plan is submitted to pay creditors over time. The advantage of a chapter 13 is the court plan decides how much will be paid, and not the loan holders determining payments. The court-determined payments are typically stretched over a three to five year period. After the repayment period is over the remainder of balance on loans is still owed. This is a good time to file the petition (adversary proceeding) to discharge the remaining debt based on undue hardship.
There are pros and cons to filing a bankruptcy, such as remaining in credit history for ten years. Medical issues and future income potential are looked at heavily in bankruptcy proceedings; for a lot of people discharging a student loan can, this can make a difference if undue hardship persists.
Consulting with a lawyer is the first step because every case is unique in circumstances. The procedural process is difficult and a good lawyer will understand this process. If a lawyer states a student loan cannot be discharged, move on to a lawyer who has an understanding of the Brunner test and is familiar with cases of student loan debt discharges.
It is important to consider all options when eliminating any student loan debt, like an income –based repayment (IBR) program, student loan forbearance or Obama’s student loan forgiveness program. For people working in specific industries, a large portion of debt can be discharged by Public Service Loan Forgiveness. As a result of ongoing problems of college student loan debt continuing to grow, more and more programs are being implemented to aid struggling debtors. It can be exhausting and overwhelming to keep up with the many changes, but know that help is available.
If the only decidable option is bankruptcy, then be prepared for the challenge. Filing for a bankruptcy stops collection actions and automatically keep creditors at bay until the creditor gets permission from the court to start collections again. Keep in mind the pros and cons, but exercise determination, especially in cases where medical reasons are prevalent. If a bankruptcy was filed but a request for determination of undue hardship was not made, the bankruptcy case can be reopened at any time without additional filing fees to file this proceeding.
The most important quest in student loan debt relief is knowledge. Educate, then exercise your options.