Student Loans Out of Control? Are You Eligible to Discharge Them?
There is a wide-spread belief that student loans are only non-dischargeable in bankruptcy if they are government student loans or loans owing to a nonprofit institution of higher education. Historically, under the 1979 amendments to the Bankruptcy Code, that was true for a time. However, there have been a series of amendments since 1979 gradually expanding the definition of what is included in the exception to discharge for student loans. It is now very difficult to discharge any kind of student loan, including private student loans and student loan refinancing.
Student loans are presumed to be non-dischargeable. A student loan provider does not have to take any active steps in a bankruptcy case to have themselves declared a non-dischargeable debt. If the bankruptcy debtor does nothing special, the student loan will not be discharged. The burden is on the bankruptcy debtor who wants to discharge a student loan to take active steps to have the loan discharged.
So, under what circumstances can a student loan be discharged in bankruptcy? The language of the statute states that a student loan may be discharged if excepting it from discharge would pose an undue hardship on the debtor and the debtor’s dependents. That sounds pretty simple initially, especially considering people generally only file bankruptcy in the first place if they believe they have an undue hardship. In practice, as that provision has been interpreted by courts, it is a much more complicated and difficult standard to meet than might initially be presumed.
In determining whether a student loan causes an undue hardship, the courts in Pennsylvania have adopted the “Brunner Test” from a 2nd circuit case, which requires a debtor seeking to discharge student loans to prove that:
- Based on current income and expenses, the debtor cannot maintain a minimal standard of living for herself and her dependents if forced to repay the loans;
- 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
- The debtor has made a good faith effort to repay the loans.
The hardship must be more than just the usual hardship that accompanies any bankruptcy. It is more than just inability to pay debts. It requires more than just tight finances. It requires severe and ongoing circumstances that are beyond the debtor’s reasonable control.
The minimal standard of living in the first prong provides for the debtor to pay for shelter, utilities, food and personal hygiene products, vehicle expenses, health care, and some small diversion such as television or keeping a pet. It does not include luxury expenses or savings. Any excess funds above those minimums must be allocated to student loan payments to determine if the debtor can repay the loans. The student loan provider is entitled to challenge the debtor’s actual expenses and argue that their home, utilities, and other costs are more than the debtor actually needs or that the debtor could live less expensively. Furthermore, the court must look at the household as a whole, including adult children living with the debtor and earning their own income. The court has ruled that even where a debtor is on disability and receiving only a very minimal amount of income, the debtor may not discharge student loans so long as other household members are able to maintain more than a minimal standard of living for the debtor’s household overall with enough available funds to make payments on the student loans.
In determining if the state of affairs is likely to persist, the court typically looks at factors including employment history and ongoing chronic medical problems. Being unemployed now or down on your luck is not enough. Typical circumstances include long-term physical or mental problems that make employment impossible, lack of marketable job skills, the necessity to fully support several dependents with limited means, low maximum income potential in the chosen education field, and older age with limited years remaining in the debtor’s work life to make loan payments.
In determining if the debtor made good faith effort to repay the loans, it looks not only at the debtor’s payment history on the loans, but also at the debtor’s efforts to increase income, decrease expenses, restructure debts, and the reasons why the debtor did not make loan payments.
The standard to discharge student loans is difficult, but not impossible. Go to an attorney who is willing to fight for you to discharge loans that are causing you an undue hardship. To schedule a consultation with a Scaringi Law attorney call 717 657 7770.