Bankruptcy Law Blog

Thursday, January 28, 2016

Relief on the Horizon for Student Loan Borrowers

Can student loans be included in a bankruptcy petition?

Discharging student loans in a bankruptcy petition have been restricted by law. However, recent cases suggest that appellate courts could may craft a broader definition of how much distress a borrower needs to be in before discharging student loans.

As has widely been reported, the amount of outstanding student debt has risen dramatically in the last decade. In 2005, the US Court of Appeals established a standard for discharging student loan debt in a bankruptcy. Since then, lower courts have ruled on the issue opening the door to the possibility of the Supreme Court weighing in on this issue.

Currently, the law requires a borrower prove paying student loans would cause an “undue hardship” to have it discharged. But different courts have adopted different definitions of this standard. For example, the eighth circuit (which covers states in the middle of the country), applies a different, less stringent test - the totality of circumstances. This test takes “a broad-based view” about whether the debtor’s circumstances rise to the level of undue hardship,

On the other hand, most appeals court throughout the country apply “the Brunner test” to determine whether a debtor is eligible to have student loans discharged. Among other things, the test requires a debtor prove a minimal standard of living cannot be maintained if the student loan must be paid and that a good faith effort has been made to repay the loans.

A current case working its way through the first circuit, however, could see the “totality” test applied which would divide the appellate courts’ rulings. So, the Supreme Court might be compelled to intervene in order to set a national standard.

For some borrowers, discharging student loan debt in a bankruptcy could provide much needed debt relief. In fact, one-in-four student loan borrowers is in default. But the legal impediments remain as borrowers continue to resist getting student loan debt discharged in a bankruptcy petition. To obtain help in choosing the best method for handling your student loan debt, you should consult with an experienced bankruptcy attorney for advice and guidance.  

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