There are ongoing changes in and around the realm of higher education finance in recent years resulting in confusion surrounding discharging student loan debt in bankruptcy. While experts will agree that it is technically possible for a student loan to be discharged during a bankruptcy proceeding, it is only possible when certain conditions are met. Generally, federal student loans are not dischargeable. But not all student loans are qualified federal student loans.
Federal Student Loan Discharge:
Federal student loans can be discharged if the borrower can establish an “undue hardship” under the Brunner test. Brunner is the case that set the standard for defining “undue hardship.” Undue hardship under the Brunner test means that there are extenuating circumstances that create an undue financial hardship for the borrower and that the circumstances are likely to continue for the full term of the student loan. It also requires that the borrower made good faith attempts to repay the loan.
To get a student loan discharged under the Brunner standard, a lawsuit within bankruptcy court is filed. This is called an Adversary Proceeding. In this lawsuit the debtor presents evidence that payment of the student loan would create an undue hardship for the debtor. If successful, the loan obligation is discharged.
Private Student Loan Discharge:
Private student loans that are not qualified federal student loans may be determined to be discharged in an Adversary Proceeding because many of these loans are not of the type that is excluded from discharge. Student loans provided to a less than full time student may fit this category. Student loans that did not go toward an educational benefit may fit this category. Schools not qualified for Title IV funding may provide student loans but they may not qualify to be protected from bankruptcy discharge. Many vocational and/or trade schools provide student loans and these loans may be dischargeable. Servicers of some of these loans are Navient and AES.
Options if student loan discharge is not available:
If a student loan is not dischargeable there are a few options outside of bankruptcy. For those with federal student loans, Income-Driven Repayment plans calculate a payment based on the borrower’s income and family size. Student loan borrowers approved for an Income-Driven Repayment plan sometimes are rewarded with loan balance forgiveness after a number of years, usually 10. Lenders who offer private student loans that are not discharged may also be willing to negotiate the terms to make payment plans that fit the borrower’s budget.
Bankruptcy will alleviate the overwhelming nature of the debtor’s finances such that by reduction of credit card debt or medical bills, cash flow improves making it easier to pay off student loans. Other common resolutions available to student loan borrowers may require moving to a more affordable living area and realistically living within their means. A few borrowers suffering from persistent and oppressive undue hardship may find relief through the bankruptcy court adversary proceeding.
Be informed and know where you stand:
If you already filed or are considering bankruptcy and have student loan debt, do your homework. Our office has the means to analyze and evaluate your student loans to determine if they may be dischargeable. If you received a bankruptcy discharge in the last several years and have a non-qualified student loan that you have been paying, find out if it was subject to the discharge order. If it was subject to discharge you may be able to get a refund of the amount paid after your bankruptcy was filed, plus interest. Every situation is different. If you need assistance determining how bankruptcy provides relief from student loan debt, please get in touch with one of the experienced bankruptcy attorneys at Dolen, Tucker, Tierney & Abraham.