Student loan debt in the U.S. totaled close to $1.7 trillion in 2021, according to Forbes. That’s higher than debt for credit cards and auto loans, and second only to mortgage debt. Bankruptcy helps many people get out of debt or pay it off. However, a discharge of student loan debt is hard to come by. Nonetheless, if the court can determine undue hardship, your student loan may be discharged in a bankruptcy filing.
With the pandemic-related suspension of federal student loan payments ending January 31, 2022, the following information is important if you’re struggling to repay a student loan.
What Does Undue Hardship Mean?
The concept is that undue hardship would be imposed on you or your dependents by repaying the debt you owe. When you declare Chapter 7 or Chapter 13 bankruptcy, an “adversary proceeding” requested by the court is intended to assess the level of hardship repayment would impose. If undue hardship can be proven, the court will cancel your student loan. Examples of cases in which this can occur include:
- The court determines the borrower has reached maximum earning capacity and does not earn enough to pay the loans and support their family.
- A married couple works, but still earns just barely above the poverty level; despite having a tight budget, they spend more per month than they earn.
- Discharge was granted when the court determined the borrower did not benefit from their education or the school/program was fraudulent.
The court can rule in your favor if your income doesn’t show signs of improving or you’re on public assistance, dependent on a family member, or have a debilitating illness or injury. Other considerations include having a child who needs round-the-clock care, divorce has reduced family income, and or your dependency on disability checks or public assistance. If you support your spouse, and they are permanently injured/disabled, you may qualify as well.
The determining factor is your situation is unlikely to improve such that it would be feasible to repay your debt.
Minimum Standards for Undue Hardship
There are various ways the bankruptcy courts determine undue hardship. Factors include that repaying the loan prevents the borrower from maintaining a minimal standard of living, the hardship will continue for a substantial part of the repayment period, and you’ve made good faith efforts to repay the loan.
If the bankruptcy court does rule on your side, repayment obligations are determined by the court’s terms. In the best-case scenario, the loan is fully discharged and collection activity ceases. The loan may also be partially discharged. You’ll then have to repay a portion of it. Or, the court may require you to repay the loan with a lower interest rate or other change in terms.
How Can I Simplify Student Loan Bankruptcy?
The Fresh Start Through Bankruptcy Act of 2021, a bipartisan bill introduced in August 2021 by Senators Dick Durbin (D.-Illinois) and John Coryn (R-Texas), aims to make discharging student loans easier. It would allow borrowers of federal student loans to request a bankruptcy discharge, but only 10 years after the first payment was due. An undue hardship discharge option would also be available for federal student loans due for less than 10 years, and for private student loans.
Standards for Undue Hardship
A variety of conditions must be satisfied, such as:
- Preponderance of the Evidence Standard: Must be satisfied by student loan creditors to prove their claims against you are valid. The type of loan and how far behind you are on payments are just a couple of factors.
- The Brunner Test: Used in most states, the Brunner test assesses your current and foreseeable financial situation. It also factors whether you’ve tried to repay the loan in good faith.
- The Totality of Circumstances Test: States in the Eighth Circuit use this test to consider relevant facts and circumstances rather than weigh consistent attempts to reduce expenses, find employment, maximize income, and other good faith efforts to repay.
Can I Avoid Bankruptcy and Discharge My Student Loan?
While a loan holder can choose not to oppose your claim, and the Department of Education can allow them to accept it if litigation costs exceed a certain threshold, there are other options. If you have a federal student loan and suffer a physical or mental impairment, you could qualify for a Total and Permanent Disability Discharge. This avoids going to bankruptcy court.
An administrative discharge may also be obtained in cases involving a closed school, false certification, an unpaid refund, or death. You could also manage repayment using options such as forbearance, deferment, or loan rehabilitation.
Contact OakTree Law
At OakTree Law, our Los Angeles bankruptcy attorney will assess your unique financial situation and determine whether claiming undue hardship can result in a discharge. We fully understand the complexities of student loan debt and the most current laws and regulations. Request a free evaluation online or call 888-348-2609 to get started.