StudentLoanDebt3It is extremely difficult to discharge student loans (both private and government) in bankruptcy. For a student loan to be discharged, the debtor must file a lawsuit in the bankruptcy against the creditor and prove the existence of an “undue hardship.” In the Ninth Circuit (which includes Washington and Oregon), the debtor must prove three things to establish an “undue hardship”:

  1. First, the debtor must establish “that (he/she) 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. Second, the debtor must show “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. Third, the debtor must show that the debtor “has made good faith efforts to repay the loans.”

This three-prong test is called the “Brunner Test” after the Second Circuit Court of Appeals’ decision in In re Brunner, 46 B.R. 752, 753 (S.D.N.Y., 1985) ( Aff’d by 831 F.2d 395 (2d Cir. 1987)). This test was adopted by our Ninth Circuit Court of Appeals in In re Pena, 155 F.3d 1108 (9th Cir.1998).  See also, In re Hedlund, 718 F.3rd 848 (9th Cir. 2013).  The above citations are taken directly from the Pena decision.

The first prong concerns the debtor’s current budget. In short, the debtor’s budget must be tight and evidence an inability to fit a loan payment into the budget.

The second prong requires a showing of an ongoing financial problem during the remaining balance of the 10-25 year repayment period of the loan. An example of this might be a permanent medical condition that prevents more than minimal income employment.

The third prong requires that the debtor has tried to repay the loan. This means that the debtor has made payments when possible, sought employment or improved employment to be able to afford payments, sought an agreed reduction in the payment via any available income contingent repayment options/programs including loan consolidation and/or refinance, and pursued any other reasonable action to be able to make payment.

It is extremely difficult to prove these three things. But, if a debtor can prove these three things, then the debtor has proven “undue hardship” and the student loans are discharged. It is important to note that Courts have the authority to discharge part of a loan when the debtor has an ability to pay only part. As a result, partial relief may also be available.

In conclusion, it is quite difficult to qualify for a student loan discharge. But, knowing the law increases your chances to succeed in the appropriate case.

As a final note, it should be noted that there are non-bankruptcy methods to help a borrower address student loan debt. Various programs exist to reduce the student loan debt and payments. Included in these programs include the following: Income Based Repayment, Income Contingent Repayment, Income Sensitive Repayment, and Loan Consolidation.

There are several helpful websites that can provide information on these programs and more.

  1. US Department of Education’s Federal Student Aid
  2. US Department of Education’s Borrower Services (Federal Direct Consolidation Loans website)
  3. The Initiative for College Access and Success’ “Project on Student Debt”

Sometimes bankruptcy is not the answer – and you just have to know where to look.

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