Student loan debt outstanding in the United States now exceeds $1 trillion. One in 10 graduates accumulate more than $40,000 in student loan debt, and many find themselves with well over $100,000 of debt upon completion of studies. If you are struggling to repay your student loans, bankruptcy may provide a route to get rid of that burdensome student loan debt.
The general rule is that student loan debt is non-dischargeable (you can’t automatically get rid of it) in Chapter 7 or Chapter 13 bankruptcy. However, there is usually an exception to every rule; and there is certainly an exception to the rule of non-dischargeability of student loans in bankruptcy. If you can demonstrate that repaying your student loans would cause an “undue hardship”, you may be able to eliminate your student loans in bankruptcy.
Understanding the Undue Hardship Exception
The “undue hardship” exception is used by Bankruptcy Courts across the nation to determine whether a debtor is eligible to discharge his or her student loan debt. In order to discharge student loan debt in bankruptcy, a debtor must demonstrate that repaying the student loan would create an undue hardship. Unfortunately, there is currently no uniform test applied in every Federal Appeals Court Circuit to determine whether repayment would constitute “undue hardship”.
The “undue hardship” standard is a demanding bar and it can take significant time and money for a debtor to establish the requisite level of undue hardship in order to receive a discharge of their student loan obligations. If you seek to discharge your student loans in bankruptcy, you must file a “Complaint to Determine Dischargeability” via adversary proceeding with the Bankruptcy Court after commencing your bankruptcy proceedings in either Chapter 7 or Chapter 13. After filing this complaint, you must prove that your loans will cause an undue hardship by way of an evidentiary hearing before your assigned Bankruptcy Judge. You will likely encounter opposition from your student loan lender upon filing your complaint to determine dischargeability. There are many hurdles along with way to attain a determination of dischargeability of a student loan.
However, if you find yourself in a situation where you live on a tight budget without excessive spending on luxury items, you have tried all you can to repay your student loans, and your current financial outlook appears to be longlasting; you have a decent shot at getting rid of your student loan debt through bankruptcy.
California follows the Brunner Test (Along with the 2nd, 3rd, 6th, 7th and 9th Circuits)
In determining whether a debtor qualifies for a discharge of student loan indebtedness, some courts use what is known as “Brunner” test. This is named for the case in which it was first used, Brunner v. New York State Higher Education Services Corp. You may be able to get your student loans discharged in bankruptcy if you meet all three of the following factors:
- POVERTY. If you are forced to repay your loans, you cannot maintain a minimal standard of living for yourself and your dependents based on your current income and expenses.
- PERSISTENCE. Your current financial situation is likely to persist for a significant part of the student loan repayment period.
- GOOD FAITH. You have made a good faith effort to repay your student loans.
Other Circuits use the Totality of the Circumstances Test
Other Federal Appeals Court Circuits use the “totality of the circumstances” test to determine whether a borrower would suffer undue hardship if he or she was forced to repay student loans. A court using the totality of the circumstances test will look at all relevant factors in your case to determine whether you meet the undue hardship standard.
Other courts use different tests to evaluate undue hardship. You should consult with a bankruptcy attorney to determine whether you might be able to qualify to discharge your student loans in bankruptcy.
Defenses to Student Loan Debt
If you file for bankruptcy, you may be able to raise a defense to your student loan debt. This is different from proving undue hardship. Examples of defenses to student loan debt include breach of contract, fraud, or unfair or deceptive business practices. These defenses can be raised in response to the creditor’s “Proof of Claim.” If you succeed in raising a defense to student loan debt, you do not owe the debt at all. Thus, you will not have to discharge the debt.
Other Options for Student Borrowers
There are other options for borrowers who are struggling to repay their student loan debt. These include consolidation, income based repayment, harship forgiveness, disability forgiveness, cancellation, deferment, forebearance, and alternate payment plans. You should consult with an attorney or speak with your lender to discuss your options.
Contact a Bankruptcy Attorney
Filing bankruptcy is often very complicated. You should consult with an experienced bankruptcy attorney to determine whether you may be qualified to discharge your student loan debt in bankruptcy, or whether you have a defense or defenses to your student loans. For a free and confidential consultation with an Orange County bankruptcy attorney, call Spaulding Law Group at (714) 731-7595.