Of the 20 million Americans who attend college each year, 12 million of them will borrow money to pay for school.
All told, there is over $1 trillion in outstanding student loan debt in the United States. Of the $1 trillion in outstanding debt, $85 billion is past due. These figures make it apparent that many Americans are finding great difficulty in repaying their student loans.
Yet despite these statistics, student loan debt is one of the most difficult types of debt to discharge in bankruptcy. However, the common misconception that student loans are not dischargeable in bankruptcy is simply untrue.
Are student loans dischargeable in bankruptcy?
Fortunately, yes. Student loans are not categorically non-dischargeable. But from a practical standpoint, few debtors will be unable to discharge their student loans in bankruptcy.
In Nevada, student loans may discharged in bankruptcy in limited circumstances if the debtor can show that the repaying the loans will be exceedingly difficult. Section 523(a)(8) of the United States Bankruptcy states that student loans will generally not be discharged unless repaying the loans would cause “undue hardship” to the debtor.
Most people with a significant student loan burden would almost certainly characterize repayment as an undue hardship, but courts have interpreted “undue hardship” to be an extremely difficult standard to meet.
It is not enough to merely declare on your bankruptcy petition that repayment of student loans causes you undue hardship. Rather, the existence of an undue hardship must be determined by the court.
Because determining what conditions amount to an “undue hardship” is unclear, the Ninth Circuit Court of Appeals has articulated a test for what exactly constitutes an undue hardship in Brunner v. New York Higher Education Corp.
Brunner v. New York Higher Education Corp.Under Brunner, three factors must be present in order for student loans to be discharged. The debtor must prove:
- That, if forced to repay the loans, the debtor will be unable to maintain a “minimal” standard of living for himself and any dependents.
- That additional circumstances indicate that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; And
- That the debtor has made a good faith effort to repay the student loans.
Because, presumably, a person's income will tend rise over time, proving the second factor of the Brunner test can be challenging.
To determine whether the debtor's inability to maintain a minimal standard of living while repaying student loans is likely to persist over time, the court has provided a list of factors it will look to, including:
- Serious mental or physical disability of the debtor or the debtor's dependents which prevents employment or advancement.
- Debtors' obligations to care for dependents.
- Lack of, or severely limited education.
- Poor quality of education.
- Lack of usable or marketable skills.
- Maximized income potential in the debtor's chosen educational field and no more lucrative job skills.
- Limited number of years remaining in the debtor's work life to allow for repayment.
- Age or other factors that prevent retraining or relocation as a means for payment of the loan.
- Lack of assets, whether or not exempt, which could be used to repay the loan.
- Potentially increasing expenses that outweigh any potential appreciation in the value of the debtor's assets and/or increases in the debtor's income.
- Lack of better financial options elsewhere.
The presence of these factors tends to indicate to the court that the circumstances that make the debtor unable to repay the student loans are unlikely to change, thereby satisfying the second prong of the Brunner test.
If the three Brunner factors are present, the repayment of student loans may be considered an undue hardship. Only then will a debtor be able to discharge the loans in bankruptcy.
What types of loans does this apply to?
The undue hardship standard and the Brunner test apply to both private and federal student loans.
Even if I cannot demonstrate an undue hardship, can bankruptcy provide some relief for my student loan debt?
Yes. When a bankruptcy petition is filed, an “automatic stay” goes into effect. The automatic stay will temporarily prevent creditors from attempting to collect on any debts during the bankruptcy proceeding.
Additionally, in a Chapter 13 bankruptcy case, student loans can be accounted for by the Chapter 13 repayment plan, which may allow debtors to repay loans over an extended period of time.
Why should I hire an attorney?
Though the court has articulated a test for determining whether an undue hardship exists, the application of the test is far from cut–and–dried. For instance, what constitutes a “minimal standard of living” under the Brunner test? The determination is hardly objective.
An experienced bankruptcy attorney will help convince the court that all of the Brunner factors have been met and that repayment of the student loans constitutes an undue hardship. To schedule a consultation, contact 702-DEFENSE today.