Managing Student Loans: Bankruptcy Discharge

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Only one-tenth of one percent (0.1%) of people who file bankruptcy ever attempt to discharge their student loans. But of the debtors who do attempt a discharge through bankruptcy, 40% are successful in obtaining at least a partial if not a total discharge of their student loan obligations.

According to the Section 523(a) of the Bankruptcy Code,

A discharge . . . does not discharge an individual debtor for any debt-- (8) unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor's dependents, for

(A)(i) an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or (ii) an obligation to repay refunds received as an educational benefit, scholarship, or stipend; or

(B) any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual.

(emphasis added).

Undue Hardship

The most important two words in the statute are “undue hardship.” Unfortunately, the Bankruptcy Code does not tell us what “undue hardship” is. Courts have struggled with the definition for decades.

Prior to 1976, student loans were dischargeable just like any other unsecured debt. In the early 70s, however, Congress began to question whether the unfettered discharge was appropriate for students who not only took out high balance loans to pay for professional educations, but also had the potential to make high dollar incomes. As a consequence, in 1976 Congress passed legislation that prohibited the discharge of student loans less than five years old except for those that cause “undue hardship” to the debtor or the debtor's dependents.

Eleven years later, in 1987, the federal Second Circuit Court of Appeals considered the case of Marie Brunner, a social worker from upstate New York who had not been able to secure a full-time job.

See Brunner vs. New York State Higher Education Services Corp., 831 F.2d 3985 (1987). Remember, at that time, student loans that were older than five years were dischargeable. Ms. Brunner’s were not that old.

According to the court in the Brunner case, this is what “undue hardship” means:

  • 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
  • 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
  • The debtor has made good faith efforts to repay the loans

The Brunner test, as it has historically been applied, included requirements not articulated in the statute itself, including the “minimal” standard of living, a showing of additional circumstances and particularly the “good faith” efforts standard.

The Tough Brunner Standard May be Weakening

Today, most federal courts apply this test to their student loan dischargeability cases.  But, there are signs that the strict interpretation of the statute may be changing.

It is important for bankruptcy lawyers to know that at the time the Brunner case was first decided in 1987, student loans were still dischargeable if they were five years old at the time the bankruptcy case was filed, and that discharge was automatic, meaning that the debtor did not have to file a lawsuit within the bankruptcy case to determine dischargeability. In the 28 years since Brunner was decided, the rules for discharge have changed. First, Congress restricted the discharge to loans more than seven years old, then made government-backed loans non-dischargeable regardless of how old they are, subject to the undue discharge standard.

Finally, in 2005, Congress saw fit to make private loans also nondischargeable.

Many question whether the Brunner test would be decided the same way today if the judges were contemplating different facts that included loans with soaring interest for which a borrower could remain responsible into their retirement years.

In recent years, several federal Courts of Appeal and Bankruptcy Appellate Panels have decided cases that seem to chip away at the harsh Brunner standard or are at least critical of it. Some of those cases are collected in an excellent article in the Journal of the American Bankruptcy Institute, Student Loan Discharge Decisions Poke Holes in the Brunner Test.  

Other Important Considerations

     Full vs. Partial Discharge

Some courts have concluded that there are circumstances in which it is appropriate to grant a partial discharge instead of a full discharge of the student loan debt.

For instance, the court may conclude that the debtor can make some payment each month for some period of time, and the rest will be forgiven. 

     No Time Limit for Bringing a Student Loan Discharge Suit

There is no time limit for bringing an action to determine the bankruptcy discharge of a student loan. Unlike some types of discharge where a deadline exists for filing a lawsuit in the bankruptcy case, there is no time limit for filing a lawsuit on student loans.  In fact, it is theoretically possible to reopen a bankruptcy case that has been closed for many years for the sole purpose of asking the court for a determination of the dischargeability of a student loan. 

In fact, even if you brought a discharge lawsuit on your student loans in a prior bankruptcy case and lost or did not receive a full discharge of your debt, if your circumstances change later you can petition the court to reopen your case and make a new determination based on your current circumstances.

For lots more information on managing your student loans during difficult financial times, see our articles on the following issues:

General Issues

What Kind of Loans Do You Have?

Your Options for Managing Student Loans in a Nutshell

Glossary of Helpful Student Loan Terms

When You Can't Make Your Payments

Delinquency and Default

Deferment and Forbearance

Repayment Strategies During Tough Times

Surviving a Student Loan Default

Dealing with Student Loan Collectors

Managing Private Loans

Loan Forgiveness

Loan Forgiveness for School Status

Loan Forgiveness for Disability or Death

Public Service Loan Forgiveness

Student Loans in Bankruptcy

Bankruptcy Discharge

Discharging Private Loans

Using Chapter 13 Repayment Plans