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Bankruptcy & Student Loans

Bankruptcy & Student Loans

For many individuals, student loans are a necessity in order to continue on with their education. Those individuals spend their four years in undergrad and possibly an additional two or more years in a graduate program obtaining the necessary degrees to advance into their future careers. The problem is that after studying for all those years, these individuals not only walk out with a degree in their hand, but also are handed a bill six months later from their student loan lender.

Student loans are being discussed more and more as students graduate from expensive colleges only to find out they do not have the income to support their standard monthly student loan payment after deducting their regular monthly expenses. Often times, these individuals rack up excessive credit card debt to pay for some of these expenses and over time these individuals contemplate what they can do about their financial struggles, including filing for bankruptcy.

Unfortunately, student loans are generally non-dischargeable in bankruptcy, meaning they do not go away at the end of the bankruptcy. In order to discharge a student loan, the individual filing for bankruptcy (the debtor) must show that the repayment of the student loan would impose an “undue hardship” on the debtor and his or her dependents. [1] The initial reaction to this is, “Well of course I have an undue hardship, I can’t pay my expenses. Why else would I be filing for bankruptcy!?” However, the Bankruptcy Courts have determined that the level of “undue hardship” is substantially more than not having the ability to pay your monthly expenses. Instead, Pennsylvania follows the “Brunner Test”. [2]

The Brunner Test requires the debtor to show that:

  1. based on current income and expenses, the debtor cannot maintain a minimal standard of living for the debtor and the debtor’s dependents if forced to repay the loans;
  2. additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period for the student loans; and
  3. the debtor has made a good faith effort to repay the loans.[3]

The test requires that all three elements are met in order for a student loan to be discharged. Over the years, the amount of cases on whether an individual’s student loans can be discharged has continued to grow. In the vast majority of those cases, the second prong of the Brunner Test is by far the most difficult part of the test for a debtor to pass. Different courts throughout the United States have adopted non-exhaustive lists of factors to be considered in evaluating the second prong of the Brunner Test.[4] Such factors that are often reviewed include: age, mental or physical disability, education or degree(s) obtained, job market, debtor’s attempt to obtain employment, debtor’s attempt to minimize expenses, and care needed for debtor’s dependent(s).

In sum, student loans are special and unique unsecured debts. Although they are generally non-dischargeable, it is not impossible to have them discharged. Outside of bankruptcy, there are other options such as repayment programs through the student loan lenders. If the student loans were government issued loans, there are several repayment options such as income based, income contingent, and revised pay as you earn repayment plans.[5] In order to consider moving forward, it is important to have an attorney review your financial situation to determine whether a bankruptcy petition would be appropriate for you or whether another type of workout would be a more appropriate alternative.

[1] 11 U.S.C. §523(a)(8)

[2] In re Faish, 72 F.2d 298, 306 (3d Cir. 1995) citing Brunner v. N.Y. State Higher Educ. Servs. Corp., 831 F.2d 395 (2d Cir. 1987).

[3] Id.

[4] In re Price, No. 15-17645 (Bankr. E.D. Pa. 2015) See In re Oyler, 397 F.3d 382, 385 (6th Cir. 2005) citing In re Miller, 377 F.3d 616, 623 (6th Cir. 2004); In re Nys, 446 F.3d 938, 947 (9th Cir. 2006) quoting In re Nys, 308 B.R. 436, 443-44 (B.A.P. 9th Cir. 2004).