Friday, August 5, 2011

Bankruptcy Common Questions: Student Loans

As a Albuquerque bankruptcy attorney I am often asked if student loans can be discharged by filing a bankruptcy. Generally the answer is no, because while it is possible to have student loan debt discharged, it can be very difficult to get the debt discharged. At one time, student debt was treated like other types of unsecured debt, meaning it could be discharged. In 1998 the bankruptcy code was revised and made it so that student loan debt is presumed to remain with the debtor after a bankruptcy (or in other words there is a presumption that student loan debt will not be discharged). The change was enacted in Section 532(a)(8) of the bankruptcy code and was meant to address abusive student debtors and to ensure solvency of student loan programs. There was a point in time where debtors would file bankruptcy specifically to avoid paying their student loans. In 2005 the bankruptcy code was changed again which made private student loan lenders treated like government loans, meaning there is no longer an important distinction on who lent the funds.

In order to rebut the presumption regarding student loan debt, the debtor must initiate an adversary proceeding, and claim that the student debt presents an undue hardship on the debtor and the debtor’s heirs. The question then becomes whether the debtor has an undue hardship. There are a variety of tests used to determine undue hardship. The most widely used is the Brunner test first articulated in Brunner v. New York State Higher Education Services Corp., 831 F.2d 395, 396 (2d Cir. 1987), and requires the debtor to prove:

“(1) that the debtor cannot maintain, based on current income and expenses, a ‘minimal’ standard of living for herself and her dependents if forced to repay the loans; (2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and (3) that the debtor has made good faith efforts to repay the loans.”

Under the test, if the court finds that one of the elements is not met, the student loan debt will not be discharged. Another test used in the 8th circuit is the totality of the circumstances test as articulated in Andrews v. South Dakota Student Loan Assistance Corp.(In re Andrews), 661 F.2d 702, 704 (8th Cir.1981):

“(1) the debtor's past, present, and reasonably reliable future financial resources; (2) a calculation of the debtor's and her dependent's reasonable necessary living expenses; and (3) any other relevant facts and circumstances surrounding each particular bankruptcy case. Simply put, if the debtor's reasonable future financial resources will sufficiently cover payment of the student loan debt-while still allowing for a minimal standard of living-then the debt should not be discharged.”

The 10th circuit, of which New Mexico is included, has adopted the Brunner test, but noted that the traditional test has been used to disallow the discharge of student debt to even those in the worst of circumstances; and try to apply an approach that is less rigid than the traditional Brunner test. Now while the Brunner test is not insurmountable, it certainly requires that the debtor be experiencing dire circumstances. If you have more questions about what types of debt are or are not dischargeable in bankruptcy, you should contact a bankruptcy lawyer in your state.

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