A broad spectrum of student loans is not dischargeable in bankruptcy unless the court determines that repayment would cause an "undue hardship" to the borrower or the dependents of the borrower. Many commentators view the undue hardship requirement as a virtually insurmountable barrier. In reviewing reported cases over the last eight months that directly addressed student loans in the context of bankruptcy, almost one-third of these court decisions allowed a discharge. There are several lessons to learn from these recent decisions.
LexisNexis listed 46 court decisions containing the words "student loan, discharge, undue hardship, and bankruptcy." Ten of these decisions only marginally and indirectly considered student loans and were discarded. Four decisions involved divorce or child support proceedings and also were not considered. Of the remaining 32 decisions that directly considered the discharge of a student loan in bankruptcy, ten allowed the discharge.
Many of the court decisions mentioned the "Brunner Test." This test stems from Brunner v. New York Higher Education Services Corporation, a 1987 decision by the federal Court of Appeals for the Second Circuit that affirmed a federal District Court's decision. In excess of 850 court decisions have cited Brunner in the context of student loans. Marie Brunner represented herself Pro Se before the Court and was denied a bankruptcy discharge of her student loans.
The Brunner trial court defined "undue hardship" with a three-part test:
1) That the debtor cannot, based upon current income and expenses, maintain a "minimal" standard of living for himself or herself and his or her dependents if forced to repay the loans, 2) that this state of affairs is likely to persist for a significant portion of the repayment period of the student loan, and 3) that the debtor has made good faith efforts to repay the loans.
Additionally, the debtor in bankruptcy must affirmatively request a determination by the Bankruptcy Court in an "adversary proceeding" instituted against the creditor that the debtor meets the three-part test. The creditor must be granted an opportunity to contest the debtor's allegations. There is no right to a jury trial. A bankruptcy court's determination of the facts will only be overturned if "clearly erroneous." A general bankruptcy discharge of debts, even if the student loan is listed as a debt, alone does not meet the adversary proceeding requirement.
Furthermore, Congress amended an applicable statute so that there is no statute of limitations (limited time period) in which the creditor must attempt to collect the student loan or lose that right. Thus, in one case, the student loan was advanced in 1977, a general bankruptcy discharge was granted in 1999, and attempts to collect the student loan began in 2012. The student loan was not discharged in bankruptcy and collection efforts could continue.
The 22 decisions that denied a bankruptcy discharge of a student loan fell into these general categories. In seven cases the debtor had failed to properly conduct an "adversary proceeding" after listing a student loan in a bankruptcy petition. In many cases several parts of the three-part Brunner Test were not met. Four cases failed Part One. Six cases failed Part Two. Five cases failed Part Three. Debtors unsuccessfully attempted to categorize their debts as not "student loans" in three cases. A bank line of credit that was used for educational expenses was a student loan. Loan proceeds spent for room and board while in school constituted a student loan. A consolidated loan consisting of prior student loans was a student loan.
The 10 cases granting an undue hardship discharge of a student loan typically focused most discussion on Part Two of the three-part test. Part Two requires the Bankruptcy Court to look far into the future over the projected life of the student loan. Thus, paralysis from the chest down satisfied Part Two. Five cases involved severe and long-lasting mental and physical health issues. Among these five, one decision stated that advanced age (57) made it unlikely that her employment prospects would improve. Another case involved a single mother raising two children ages 8 and 4 years whose best employment would require overseas deployment. However, an individual who suffered severe physical and mental trauma but was slowly "transitioning" to another line of work was denied a discharge of her student loan.
Finally, failure to pay the tuition directly due to a university did not constitute a "student loan" and could be discharged without meeting the strict student loan standards. The university's "Registration Contract" was created electronically before classes began. The Registration Contract was silent concerning the consequences of nonpayment other than a cancellation of classes. Consequently, it could not be inferred to be a student loan. Presumably a differently structured registration process might create a "student loan" as understood in the Bankruptcy Code. Two additional cases were remanded for a more detailed presentation of the facts associated with the claim of undue hardship.
In conclusion, it is possible, although difficult, to discharge a student loan in bankruptcy. One must carefully meet all of the requirements discussed above. Finally, courts increasingly require the debtor to participate in any income-based repayment programs that will reduce monthly payments. In one case that denied a discharge of the student loan, the court noted that the debtor had consciously chosen not to participate in a program that would have lowered her current payment to $0.00 a month until her income increased. Another decision allowed a partial discharge of any remaining debt after the debtor participated in the Income-based Repayment Plan (IBRP). The legal and factual aspects of student loan indebtedness are truly unique. For this reason, anyone considering bankruptcy to discharge student loans should consult an experienced attorney.
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