Bankruptcy and Student Loans, a Brief Overview

The recognized current standard for including student loans in a bankruptcy discharge is broadly defined as a clear showing that the payment of the student loan debt will impose an undue hardship on the Debtor and his or her dependents. To meet this standard the Bankruptcy Courts have implemented the Brunner test. The Brunner test requires a showing that:

1. The Debtor in Bankruptcy can not maintain, based on income and expenses, a “minimal” standard of living for the Bankruptcy Debtor and the Debtor’s dependents if forced to repay the student loans,
2. Additional circumstances exist indicating that this state of financial affairs is likely to persist for a significant portion of the repayment period required for the student loan, and
3. The Debtor in Bankruptcy has made good faith efforts to repay the Student Loans in which they are seeking a discharge. Brunner v. New York State Higher Educ. Servs. Corp., 831 F.2d 395(2d Cir. 1987).

Restrictions on including student loans in bankruptcy have not always been so drastic. Through and until 1998 federal student loan debt was dischargeable in Bankruptcy after applicable waiting periods post graduation. In 2005, non-dischargeability in bankruptcy was extended to private student loan debt with the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act. Today, the Brunner test referenced hereinabove is controlling and makes the dischargeability of student loans a rare case for Debtors in Bankruptcy.

The Center for American Progress, (the “Center”) based in Washington, DC, among other Political Organizations are calling for change regarding the dischargeability of student loans in Bankruptcy. The Center is calling for guidelines to determine “Qualified Student Loans” which would offer reasonable repayment conditions including low interest rates, favorable forbearances, deferment and income based loan repayment options. The Center argues that loans which do not meet the above criteria should be eligible for a discharge in bankruptcy just like other debts including credit cards, personal loans, payday loans and medical bills. Although no changes have yet to be implemented, there may be some progress regarding dischargeability of student loans in bankruptcy proceedings.

To speak with one of our lawyers regarding your financial situation and to determine if Bankruptcy Law is right for you, please contact one of our conveniently located law offices listed below.

CENTER CITY PHILADELPHIA: 1315 Walnut Street, #302 Phila., PA 19107 215-545-0008
NORTHEAST PHILADELPHIA: 2375 Woodward Street, #105 Phila., PA 19115 215-545-0008
DELAWARE COUNTY OFFICE: 1515 Wallingford Road, #218, Springfield, PA 19064 610-432-3111

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