If you look online there is a general consensus that personal bankruptcy – either Chapter 7 or Chapter 13 – cannot help you with student loan debt. The truth is that bankruptcy may not offer a complete solution to your student loan debt obligations but bankruptcy can often be part of the solution.
Years ago in the 1980’s, when I started practicing bankruptcy law, government guaranteed student loan debt was dischargeable if it had come due more than seven years prior to the date a debtor filed bankruptcy. Private student loan debt was often dischargeable regardless of when it first came due.
All of this changed in 1988 when Congress amended Bankruptcy Code Section 523(a)(8), which created a presumption that student loan debt was not dischargeable at all unless you could show something called “undue hardship.” Over the next few years bankruptcy court judges and appeals court judges heard cases and issued decisions attempting to interpret the term undue hardship.
In 1987, the 2nd Circuit Court of Appeals issued a decision called Brunner vs. New York State Higher Education Services Corp. which interpreted undue hardship as meaning that (1) the debtor cannot maintain a minimal standard of living for himself and his dependents; (2) that this state of affairs is likely to persist for a significant portion of the repayment period for student loans; and (3) that the debtor has made a good faith effort to repay those loans.
Soon afterwards, appellate courts around the country, including courts in the 11th Circuit (the Northern District of Georgia is in the 11th Circuit) adopted the Brunner test as the standard for determining undue hardship.
Brunner Test Puts Overwhelming Burden on Student Loan Borrowers
The Brunner test puts a significant, often overwhelming burden on debtors and for many years very few debtors were able to demonstrate undue hardship. In addition to this very strict standards, debtors seeking to prove undue hardship had the added burden of funding litigation. This means that a person who is alleging that he/she does not have enough income to maintain a minimal standard of living will have to find the money to pay a lawyer $10,000 to litigate this issue, when the odds are definitely not in the debtor’s favor.
Because of these overwhelming burdens, very few debtors even attempted to demonstrate undue hardship. Bankruptcy was and remains a tool to help student loan debtors by eliminating other debts so that the student loan borrower can allocate his/her resources to paying student loan debt after discharge.
If, for example, you are looking at $100,000 of student loan debt, you can use bankruptcy to walk away from your house, an expensive car and credit card debt so that a greater portion of your income can be used to pay down student loan debt.
As a matter of public policy, this privileged positioning of student loan debt has created some problems in our economy and both the federal government and the bankruptcy courts have slowly been eroding what seemed to be absolute protection for student loan creditors. Currently, student loan debt in the United States exceeds $1 trillion dollars and many college graduates in their 20’s and 30’s are discovering that they cannot afford to buy houses and cars because of their student loan obligations.
The Perfect Storm: Easy Money But No Way Out
Currently the United States Department of Education issues all government student loan debt and the government makes is very easy to qualify. Colleges – both traditional liberal arts colleges and vocational schools – have had no incentive to keep costs down because there is an endless source of money. So we have ended up in a situation where naive and idealistic 17 and 18 year olds are obligating themselves for tens of thousands of dollars of student loans, attending colleges with no accountability to train these students in careers that will pay enough to service these loans, and graduating with no realistic hope of paying back their debt, with bankruptcy discharge essentially unavailable.
New Hope for Department of Education Student Loan Borrowers
Over the past few years, however, there have been some small changes in the laws that offer some hope to overwhelmed student loan borrowers.
First, the federal government has created a number of income based repayment programs for federal student loan borrowers. These programs link a borrower’s monthly student loan payment to his/her income and can provide for forgiveness after either ten or twenty years of repayment. Anyone with federal student loans should definitely consider one of these plans.
There are also loan forgiveness programs for teachers and public service employees (although there has been some talk about scaling these loan forgiveness programs back).
In the bankruptcy world, some judges have been open to partial discharge of student loan debt under the undue hardship standard, although a debtor would still have to fund bankruptcy litigation.
Important New Leverage for Private Student Loan Borrowers
Very recently there have been some very encouraging decisions by bankruptcy judges considering the dischargeability of private student loans. A careful reading of Bankruptcy Code Section 523(a)(8) suggests that certain private student loans may be fully or partially dischargeable because of certain characteristics set out in the loan paperwork. Many private student loan lenders have been quietly settling dischargeability litigation in an effort to avoid adverse precedent.
Even more significantly bankruptcy debtors who included private student loans in bankruptcies filed over the past few years have had success pursuing contempt actions for damages against lenders who have been actively collecting private loan debt that was, in fact, discharged as a matter of law in bankruptcy.
In many cases, bankruptcy is the legal mechanism a student loan debtor must use to force a reasonable settlement.
So if you are struggling with government or private student loan debt, the bankruptcy process may offer options for discharge or settlement available nowhere else. If you’d like to learn more about how Chapter 7 or Chapter 13 might benefit you, please contact me directly.
