What Are The Different Tests For Student Loan Debt Discharges In Bankruptcy?
If you are considering the possibility of filing for bankruptcy and you currently have student loan debt, you may know that the U.S. Department of Justice (DOJ) recently released new guidance concerning the handling of consumer bankruptcy cases and student loan debt discharges. Many debtors who have student loan debt do not even attempt to have their student loans discharged in a bankruptcy case because they have heard that the process is too complicated, or that it is almost impossible to have student debt discharged when you file for bankruptcy. It is important to be clear that student loan debt is not one of the types of non-dischargeable debt identified in the U.S. Bankruptcy Code. However, it has been difficult for debtors to receive discharges for student loan bankruptcy in the past, and as a result, many debtors do not even try.
Why has it been difficult to discharge student loans? In addition to the complications involved in a required adversary proceeding, the tests used to determine whether student loan debt can be discharged are complex, and the burden of proof has been difficult for debtors to meet. To clarify, our West Palm Beach bankruptcy attorneys can tell you more about the specific types of tests that are used to determine whether student loan debt is dischargeable in a bankruptcy case.
Debtor Must Show an Undue Hardship
In order for student loan debt to be dischargeable in a consumer bankruptcy case, the debtor must be able to show that determining that the debt cannot be discharged would result in an undue hardship for the debtor. The specific language contained within the U.S. Bankruptcy Code (11 U.S.C. § 523(a)(8)) is this:
(a) a discharge . . . does not discharge an individual from 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 —
(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 funds received as an educational benefit, scholarship, or
(B) any other educational loan that is a qualified educational loan . . . incurred by a
debtor who is an individual.
How does a bankruptcy court determine whether a debtor has met this “undue hardship” requirement? Here is where the tests come into play.
The Brunner Test is Used Most Frequently
The Brunner test, which tends to be used most often, requires a debtor to show the following to prove an undue hardship:
- 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
- Debtor has made good faith efforts to repay the loans.
Totality of the Circumstances Test is Used Sometimes
The totality of the circumstances test, which is used less often than the Brunner test, allows a court to weigh the totality of the circumstances with these factors in mind:
- Rate, amount, and reliability of the debtor’s future financial resources;
- Debtor’s reasonable living expenses; and
- Other facts relevant to the debtor’s specific case.
Contact a West Palm Beach Bankruptcy Lawyer
With the new guidance from the DOJ, it should be easier for debtors to seek and obtain a discharge of student loan debt when they file for bankruptcy. To learn more, get in touch with one of the experienced West Palm Beach bankruptcy lawyers at Kelley, Fulton, Kaplan & Eller today.