Student Loan Discharge

  • Student Loan

A Guide to Private Student Loan Discharge in Bankruptcy

Changes are being made in the bankruptcy laws. While earlier, private student loans were treated in a manner different from federal ones, it is no longer true now. Before 2005, private student loans were treated as unsecured debts and were discharged at the end of the bankruptcy, unlike federal student loans, which required one to show undue hardship to get them discharged. In 2005, Congress made amendments due to which private student loans were to be treated similar to federal student loans. Due to this development, discharge of student loan (with few exceptions) can take place only on proving undue hardship is caused (to you or your dependents) on repayment of the loan. Thus, private student loans can no longer be treated and discharged as unsecured loans and need to meet the criteria of undue hardship to be discharged.

What is “undue hardship” criteria?

According to Dallas based law firm Recovery Law Group, undue hardship is a bankruptcy standard for discharging of federal student loan and post-2005, private student loan too. According to Bankruptcy Code

  • Section 523(a)(8), “Unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents, for –
    • (A)(i) an educational benefit overpayment or loan made, insured, or guaranteed by the government unit, or made under any program funded in whole or in part by a government unit or non-profit institution;
    • (A)(ii) an obligation to repay funds received as an educational benefit, scholarship, or stipend; or
    • (B) any other educational loan that is a qualified educational loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual.”

These exceptions are applied to all federal as well as private student loans. However, proving undue hardship is easier said than done. Numerous federal courts have used a three-pronged approach to test the undue hardship claimed by bankruptcy applicants. The Brunner Test developed after the Brunner v. New York State Higher Educ. Servs. Corp., 831 F. 2d 395 (2d Cir. 1987) is extensively used to check the undue hardship criteria.

Brunner Test

As per this test, the debtor needs to show that:

  • He/she cannot maintain a minimum standard of living (with their current earnings and expenditure) for themselves and their family if they have to repay student loan;
  • Additional circumstances which are likely to continue for a period of time interfere with the repayment of student loans; and
  • The debtor had previously tried to repay the loan in good faith.

The bankruptcy court reviews your earnings and expenses to determine the minimum amount of money required to maintain a minimal standard of living in case you pay your student loans. Your current situation is analyzed to determine any improvements which can be experienced over the repayment period. Lastly, your payment history is studied by the court over the time frame of student loans; if you had made attempts to reduce your expenses and find better or any extra source of employment.

If a debtor is able to meet the criteria of the Brunner test, it shows a degree of hopelessness, hopefully leading to the discharge of student loan debts. It must be kept in mind that even if you can’t or don’t meet all the above-mentioned criterion to get entire student loan discharged, some courts might allow partial discharge of student loans. It is important that when you file for bankruptcy, you must be mentally prepared for the student loan debt to survive as meeting the Brunner test for proving undue hardship is very difficult to meet. While previously private student loans were discharged like any other unsecured loan, now they too have tough standards like a federal student loan.

Are there exceptions to the undue hardship clause to student loan discharge?

To have your student loan discharged, you have to meet undue hardship standard. However, there are some exceptions, such as luring you into taking a course which would not benefit you as much as it was advertised. In case the private student loan was not for a competent higher education expense or was for an educational institution which is not eligible, then there are chances that it can be discharged. If you have a student loan for an unaccredited school, it can be discharged in Chapter 7 bankruptcy. An unaccredited school does not qualify to be governed under the same rules used for accredited schools. You are also allowed a discharge if the school falsely certified your eligibility for the course. Any school certifying to the education loan needs to ensure you meet the necessary requirements. If they fail to do so and you are certified for a loan, such loan can be discharged during bankruptcy. If a course required a clear criminal background, then a person with prior felony convictions cannot have benefitted from such course, thereby resulting in the loan discharge.

Automatic stay benefit

One of the best advantages of bankruptcy filing is the grant of the automatic stay, which stops all creditor action of collection. This stay is in place for the entire duration of bankruptcy, irrespective of whether you get a discharge or not. Thanks to the automatic stay, even the government cannot opt for wage garnishment or withhold transcripts for any unpaid tuition fees. However, it does not prevent student loan creditor from preparing for the availability of future loans in the hope that loans prior to bankruptcy filing will be cleared. The creditor, alternately, can also file a motion to lift the automatic stay during bankruptcy proceedings. In case, the court agrees to the creditor’s plea, the latter can continue with collection actions.

If you are worried about debt discharge in case of an ongoing bankruptcy case, consult 888-297-6203 to know your options about student loan discharge. The Federal Rule of Bankruptcy Rule 7001(6) states that you or your attorney can file an adversary proceeding against your student loan creditor. The timing of filing such an action depends on which chapter of bankruptcy you have filed (Chapter 7 or 13). Majority jurisdictions allow you to file adversary proceedings wither during your bankruptcy case or even after the case has ended.

Choosing an experienced bankruptcy lawyer can make a huge difference to your bankruptcy case, especially if you want to get student debt loan discharged. Since bankruptcy rules are quite complicated, making any error can have grave consequences. Managing student loan debt is quite important. You can either opt for bankruptcy, student loan consolidation, or repayment. Whatever your choice, consultation with bankruptcy attorneys can open numerous vistas to get student loan debt discharged.