Discharging Student Loan Debt in Bankruptcy
As the law stands now, it is difficult to get student loans discharged in bankruptcy. For many years, student loan recipients under federal government programs like, Stafford and Perkins loans, have not been able to discharge their loan debt through bankruptcy. A new portion of the law was enacted in 2005, which added the stipulation that private loans from banks would also not be eligible for discharge in bankruptcy petitions.
Sometimes, the lender has their own regulations in place under which student loans can be forgiven. A debtor should first contact the lender and describe the situation that causes the default of the debt. A Universal discharge application used for all Federally Subsidized Loans can be found here.
Even though student loan debt is difficult to discharge in bankruptcy, it is possible to do so. The borrower needs to show that payment would cause him undue hardship. Different tests by courts are used to determine if undue hardship exists for the borrower on an individual basis.
The Brunner test is often used for proving this hardship. The requirement of the test is met if a bankruptcy petitioner can’t maintain a “minimal” standard of living for the debtor and his family if he has to pay his student loan payments. It must be shown that circumstances are present that will probably continue for the entire repayment period. In addition, the debtor needs to have made sincere attempts to repay the loan. These rules (Brenner v. New York State Higher Educ. Servs. Corp. 831 F.2d395 (2dCir.1987) are the standard, but courts show some flexibility. If you or your attorney can show undue hardship, you won’t be responsibility for your student loan debts.
In order to discharge student loans, the debtor would file an adversary proceeding arguing undue hardship. The court then would need to decide whether the student loan can be discharged (Rule 7001, Federal Rules of Bankruptcy Procedure). Even if you have already filed for bankruptcy, you can reopen the case to include a request for determination of undue hardship. The court is charging court cost for reopening the case, and your bankruptcy attorney might charge an additional fee for handling the adversary proceeding.
In past cases, circumstances that can lead to discharge of loan debt are varied. In some cases, circumstances such as low income and high expenses, disability, high medical costs, attending fraudulent schools, ongoing mental illness and sometimes alcoholism. Courts interpret circumstances differently so decisions vary somewhat.
The St. Louis Bankruptcy court granted in a recent decision the discharge of student loan debt in a case where a debtor was mentally ill and the doctor provided a statement from his doctor stating that the patient was not able to work anymore.
In a different case, the court denied the discharge of student loan debt in a decision involving a debtor who had income but had several dependents and was unable to pay for basic needs and pay student loans. The court stated economic hardship is not sufficient to establish undue hardship.
The leading case about hardship discharge for the St. Louis Metro area (Eastern District of Missouri) is in re Jesperson. The debtor was an alcoholic who was not able to work due to his addiction.
If the debtor receives Social Security Disability, it might be possible to obtain an agreed order from the lender to the discharge of the student loan. Otherwise a statement from a doctor or having the doctor testify about the medical condition will be beneficial to win the case.
In cases where loan debt discharge, using a plea of undue hardship doesn’t seem likely, another option is to file for Chapter 13 bankruptcy. This is a reorganization of debt in order to pay creditors over time using future income. The debtor will be able to continue to pay the ongoing student loan payments and lower or eliminate payments on other debts.
What happens with the co-borrower’s (most often the parents) liability when the borrower received a discharged of his student loan debt?
The answer depends on the student loan. When it is a Federally Subsidized Student Loan, and the Federal Student Loan guarantor determines that the borrower has a total and permanent disability, the debt will also be discharged for the Guarantor (the parents). This information is available from the Rights and Responsibility Letter the borrower signs when taking out the student loan.
It is different for Parent Plus Loans, even when the borrower becomes disabled, the parents still will be liable for the repayment of the loan.
For the question whether tuition is dischargeable or is handled the same as student loans, watch my video about tuition or read the article.