When the bankruptcy laws changed in 2005, it became more difficult to discharge student loans. Nonetheless, in certain circumstances, it is still possible to discharge your student loans in a Chapter 7 bankruptcy.
Under the 2005 bankruptcy law, student loans are dischargeable if the debtor can show “undue hardship.” The first step is initiating a separate action, within the bankruptcy itself, by filing a Complaint to Determine Dischargeability of Student Loan. Like any other lawsuit, the person making the request, in this case the debtor, bears the burden of proving that undue hardship exists and discharge is appropriate.
In making a finding regarding whether the debtor truly faces undue hardship and cannot repay student loan debt, the courts consider three factors which arose from a 1987 case, Brunner v. New York State Higher Education Services, Inc. Most bankruptcy courts apply the Brunner test, as follows:
- Poverty: You must prove that your income and expenses do not permit you to maintain a minimal standard of living and repay the loan. The court will consider your current income and future earning potential, education, skills, health and family support obligations.
- Persistence: You must demonstrate to the court that your current financial situation is likely to continue for a significant portion of the repayment period. A long-term debilitating illness, for example, could indicate that you will remain unable to repay the loan and maintain a minimal standard of living for an extended period of time.
- Good Faith: You must show that you have made a good faith effort to repay the debt. You must show that you attempted to find work after completing your education; and if you were unable to make the payments once they became due, you should be able to prove to the court that you took your repayment obligation seriously by obtaining a deferment or forbearance.
In western states, courts may also consider a wider variety of factors, as set forth in Educational Credit Management Corp. v. Nys, a 2006 California case. Debtors within the 9th Circuit may be able to persuade the court that their student loan presents an undue hardship by demonstrating the following:
- The debtor or a family member has a serious mental or physical disability which prevents employment or advancement.
- The debtor has an obligation to care for dependents.
- The debtor has limited or poor quality education.
- The debtor lacks marketable or usable job skills.
- The debtor is underemployed.
- The debtor’s income potential in his or her field has reached a ceiling and the debtor lacks necessary skills for adequate employment.
- The debtor has limited working years left to repay the loan.
- The debtor’s age or other factors prevent retraining or relocation in search of a higher paying job.
- The debtor lacks assets that could be used to repay his or her student loan.
- The debtor’s increasing expenses outweigh any potential appreciation in his or her assets or earning potential.
- The debtor lacks better financial options elsewhere.
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