Many people think that it is impossible to get rid of student loans in bankruptcy, but that is not quite true. It is very difficult, but there are certain circumstances where student loans can be dealt with in bankruptcy. For example, in Hedland v. Educational Resources Institute, the Court discharged approximately $50,000 of $85,000 in student loan debt.
The basic test for discharging student loans is set forth in the Brunner case:
[T]he debtor must prove that: (1) he cannot maintain, based on current income and expenses, a "minimal" standard of living for himself and his dependents if required 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; and (3) the debtor has made good faith efforts to repay the loans.
1. Cannot maintain minimal standard of living and repay student loans
This may sound like a very hard burden for a debtor to discharge student loans in bankruptcy. And it is. The kinds of cases that meet this burden usually involve someone with a low (near minimum wage) hourly wage or someone on disability. There are a lot of circumstances that would contribute to a finding that the debtor cannot maintain a minimal standard of living. For example, if the debtor has 5 children to support, the income to maintain a minimal standard of living might be lower. And many courts have determined that this is not an all-or-nothing question. If a debtor in bankruptcy has $200,000 in student loan debt and payments on that debt would put the debtor below a minimal standard of living, but payments on $50,000 of student loan debt would not put the debtor below the minimal standard of living, the court might allow the bankruptcy discharge to apply to $150,000 of the student loan debt, leaving $50,000 that is not discharged in bankruptcy.
2. Financial State Likely to Persist for Some Time
Not only do you have to have a minimal standard of living now, there have to be circumstances showing that your situation will continue for the foreseeable future. For example, if a debtor in bankruptcy has a law degree, but is waiting tables because he can’t find a law job, this may be a difficult burden to meet. But (as all of these elements), this is a very case-specific analysis. If there was some reason that it was unlikely that he would ever be able to find a law job making higher wages (or any other kind of job making higher wages), that would make it more likely that he would qualify.
3. Debtor Has Made Good Faith Efforts to Repay the Loan
It seems like this is the prong that causes most cases to fail. There are quite a few options for lowering one’s student loan payment. For example, the Income Contingent Repayment Plan (ICR) allows student loan debtors to pay only what they can afford. But the ICR only applies to loans from the U.S. Department of Education, not banks and private lenders under the FFEL program. But there are options under the FFEL program too. Anyone considering the attempt to discharge student loans in bankruptcy should first consider what other options are available and should always make good faith efforts to repay the student loans.
So, Can I Discharge My Student Loans in Bankruptcy?
If, after reading all of this, you think that you may be a good candidate for discharging student loans in bankruptcy or you just want to discuss this with an attorney, you can set up an appointment to do so by clicking here.