Student loan defaults are on the rise. Payments are often extremely high, and options for debt relief are few.
Very few borrowers manage to get their loans discharged through bankruptcy, but it’s not impossible. According to Mic, 39% of student loan borrowers have managed to at least get some of their student loans discharged, if not all of them.
Discharging Federal Student Loans Requires Borrowers to Meet 3 Criteria
Usually, your bankruptcy lawyer will need to prove three things are true if he or she is going to manage to get those loans discharged. These criteria, collectively, are known as the “Brunner Test,” which resulted from a 1987 court case called Brunner vs. NYSHESC.
According to the Brunner Test, borrowers must prove they can’t pay the loans back now, they’re unlikely to be able to pay them in the future, and they’ve made a good-faith effort to repay them in the past.
“Undue hardship” would mean the borrower is able to maintain, based on current income and expenses, a “minimal” standard of living for one’s self or dependents. Judges have a great deal of leeway in determining whether any given borrower passes the Brunner Test.
Meeting the “being unlikely to pay them in the future” criteria often depends on whether a judge believes the borrower has done everything in his or her power to maximize income and/or make the most of the degree he or she has been granted. “I’ve been looking for a job forever” rarely flies.
Brunner lost her case, but the criteria remained, and are used by most bankruptcy courts across the nation, including the courts here in Philadelphia.
Discharging Private Student Loans is Just as Difficult
Once upon a time, federal student loans were the only ones which were all but impossible to discharge through bankruptcy. Private student loans used to be treated like any other bank loan. However, the Bankruptcy Abuse Protection and Consumer Protection Act of 2005 made it harder for private borrowers too.
Now, courts continue to use the Brunner Test for private student loans as well.
Partial Wins Are Possible
There are three potential outcomes when we try to get student loans discharged in bankruptcy court. First, the judge might just say no—they won’t discharge the debt. They might say yes and offer a total discharge. They may also offer a partial discharge.
They can also work out a deal with you, structuring a plan which will offer a partial discharge after you meet certain criteria, such as remaining on the Income Sensitive Repayment Plan for a certain period (see below).
A New Legal Argument Offers Additional Options
A very small portion of the student loan market is taking advantage of a legal loophole in the way bankruptcy laws pertaining to student loans have been worded.
“Bankruptcy law says that, without proving extreme hardship, a borrower can’t discharge a loan made for an ‘educational benefit.’ This language has opened a window to cancel loans for students who argue their loans fall outside this category of debt. Such reasoning has been applied to loans obtained to attend schools without accreditation or to study for a bar exam.” –The Wall Street Journal
You stand the best chance of discharging your student loans via this argument if you attended a for-profit school who falsely represented their accreditation status, thus rendering your degree invalid and useless.
Don’t Forget About Income Sensitive Repayment Plans
Many federal student loan servicers conveniently “forget” to tell their borrowers about this option. But IBR payments can be a viable option for paying student loans, one which keeps you out of forbearance (which provides short-term financial relief but grows your balance in the long-term as interest begins to accrue).
Borrowers typically pay a fixed percentage of their gross monthly income, somewhere between 4% and 25%. If your income is low enough your monthly payment may even be set to $0.
Whether you attempted to use these plans first is one of the criteria judges will typically use to determine whether you’ve attempted to pay your loan “in good faith.” In addition, if your first loans were issued before July 1, 2014, you’ll be eligible for forgiveness after 25 years of IBR repayment. It’s not perfect, but in many ways simply working with your lender to use the IBR plan mimics what some judges would ask you to do anyway, and could serve as a “partial discharge” option without resorting to bankruptcy court.
You Won’t Know Until You Try
Passing the Brunner Test is very difficult. However, it can be done. If student loan debt is making it impossible for you to live your life, it’s at least worth a consult or a conversation. Call Sadek and Cooper to find out what your options are likely to be. We’re here to help you take back your financial life.