Is Student Loan Debt Dischargeable in Bankruptcy?
Updated: Jun 10
The short answer to this question is that generally speaking, Student Loan Debt is not dischargeable in Personal Bankruptcy. For many years, individuals who filed a Personal Bankruptcy Petition just accepted this reality. No matter how bad the economic situation was for the debtor, this was the case for many years.
Slowly, over the years, things changed and an Exception was carved out within the Bankruptcy Courts. The Exception would allow a Debtor’s Student Loan Debt to be discharged. The Exception would work in either a Chapter 7 or a Chapter 13 Personal Bankruptcy Petition.
How did this change come about? As anyone who has studied the law knows, change within the law can happen, it just depends on the circumstances! What could possibly influence the Bankruptcy System enough to make this change? The answer is actually quite simple and is applied to every area of the Law. The Law changes whenever you can show that change is reasonable. Being Reasonable is the overriding consideration a court will examine in all legal arguments that request change. Indeed, a court will not entertain the notion of change unless and until the argument for change is reasonable.
In order to make Student Loan Debt Dischargeable, we must show that it is reasonable to do so under the circumstances. The answer to the title question of this essay is simply that a Court will allow a Discharge of Student Loan Debt if the Petitioner can demonstrate “Undue Hardship”. Thus, the Exception that has evolved regarding Student Loan Debt is simply that Undue Hardship has to be proven. Magically, in the eyes of the Law, “Undue Hardship” transforms Discharging Student Loan Debt into something Reasonable. If it is considered Reasonable, it is eligible to be subject to change.
Proving Undue Hardship is a tall order and not easily achieved. Indeed, even though the Exception to allow the Discharge of Student Loans exists, the vast majority of Debtors fail to sufficiently prove it. Realistically speaking, most Debtors will fail in their argument to show a compelling amount of Undue Hardship. Thus, they will have to pay their Student Loan Debts in their entirety.
The purpose of this essay is to discuss the Exception that allows Student Loan Discharges. In doing so, we can gain a better understanding of what constitutes Undue Hardship. Again, if the Debtor can prove Undue Hardship, the Student Loan Debt will be wiped out along with the rest of the Debtor’s debts.
Initially, it must be noted that the test for Undue Hardship varies between bankruptcy courts. Remember, the Bankruptcy Court System is just one part of the much larger Federal Court system. The Bankruptcy Court System has courts in all states. However, what individual Bankruptcy Courts in different states do often is quite different. For example, a Debtor in attempting to Discharge Student Loan Debt in California will experience a different Undue Hardship test than a similar New Jersey Debtor will experience. Thus, a debtor can get a different result regarding the discharge of their Student Loans depending on the state they file it in.
Other differences between how courts handle the Discharge of Student Loan Debt are even more complex. For example, in some states, the Bankruptcy Court looks at the Undue Hardship Test as either “All or Nothing”. In other words, either the Debtor qualifies and gets their whole Student Loan Debt Discharged or they get none of it Discharged.
In some states, the demonstration of Undue Hardship will result in only a portion of the Debtor’s Student Loan Debt being discharged. Bankruptcy Courts can differ regarding the amount and overall extent of the Student Loan Discharge they will allow. Some Bankruptcy Courts are more generous than others and their handling of Student Loan debt certainly shows it. If a Bankruptcy attorney is also a good settlement attorney with excellent negotiating skills, more favorable results may happen.
Regardless of the test used in the different U. S. Bankruptcy Courts, most of them are reluctant to discharge Student Loan Debt. Therefore, generally speaking, the Bankruptcy Court system overall will be very strict. The case facts must usually be extreme for the successful Discharge of Student Loan debt. Thus, we must not forget that the tradition of Non-Dischargeability still prevails in the U. S. Bankruptcy Court system.
A debtor might have a better chance overall for a Discharge if they have a low income. Indeed, low income helps in showing that paying something is or can be an Undue Hardship. In addition, there have been cases where if the Student Loan was originally from a For-Profit Trade school, the debtor might have an advantage.
Generally, most Bankruptcy Courts will apply a test to show the Undue Hardship of the Debtor. Two of the more commonly used tests are the Brunner three-factor Test and the Totality of the Circumstances Test.
Each test requires an analysis to explain why and how they show the Undue Hardship of the Debtor.
The Brunner Test: This test is the most widely used in the Federal Bankruptcy System regardless of the state. It is a three-factor test which basically means that in order to show Undue Hardship, the Debtor must show that all three-factors (or parts of the test) tilt in the Debtor’s favor. The three Factors are:
1. Poverty: This first part will look to examine both the income and expenses of the Debtor. The Court will examine the Debtor’s ability to repay the Student Loan while maintaining at the very least a minimum standard of living. The Court will factor in the skills and future earning potential of the Debtor. The Court will also look at all other possible income sources and even the health, and marketability of the Debtor.
2. Persistence: The Debtor must demonstrate that their current financial condition is likely to continue for the foreseeable future. In other words, the Debtor must show that he cannot pay the loan payments now and that is not likely to change for a large part of the loan repayment period.
3. Good Faith: Here, the Debtor must show that they have taken reasonable (Good Faith) steps in trying to repay the Student Loan Debt. The Court will examine if the Debtor has taken advantage of programs to help them. Among these, Forbearance, and or flexible payment programs are significant. Also, if a Debtor tries to wipe out their Student Loan Debt right after they graduate college, they probably will not do well.
The Totality of the Circumstances Test: In this test, the Court will examine all facts it considers relevant in its analysis of whether Undue Hardship exists for the particular Debtor.
In looking at whether Undue Hardship actually exists, the trend is for most courts to examine each Debtor’s individual situation. If, after considering all relevant facts concerning the Debtor, the Court feels that Undue Hardship exists, the Court will discharge the Student Loan Debt.
Discharging Student Loan Debt in New Jersey or any other state is still an uphill battle, but not impossible. The history of discharging Student Loan Debt has a very strict past and on the whole has been very difficult. However, things are slowly getting better for Debtors wishing to attempt the Discharge of their Student Loan Debt.
Courts can and will discharge Student Loan Debt if the case shows that it is appropriate. It is no longer an impossible standard to meet and certainly should be viewed in that light. As time goes on, it should become easier.