The Bankruptcy Code provides that student loans may be discharged if repayment of those loans “would impose an undue hardship on the debtor and the debtor’s dependents.” Unfortunately, for the past 35 years we’ve had to contend with the “Brunner Test” to determine what constitutes an undue hardship.
The Brunner Test is a three-part analysis to determine what constitutes an undue burden. First, a debtor must show that he or she cannot maintain a minimal standard of living if required to repay the loan(s). Second, that debtor must show that these circumstances are likely to persist for a significant portion of the repayment period. Finally, that debtor must demonstrate a good faith effort to repay the loan.
Courts have created such broad interpretations of this test that eliminating student loans in bankruptcy has become a difficult and costly endeavor. The results are also inconsistent depending on your judge and district of filing for bankruptcy relief. In order to discharge student loans in bankruptcy, one must bring a lawsuit within a bankruptcy case, called an adversary proceeding, to obtain a court order determining whether a student loan may be discharged. For those reasons, many debtors avoid seeking a discharge of their student loans.
Fortunately, the Department of Justice recently issued new guidelines to clarify what they are seeking with each prong of the Brunner Test. The goals were to provide consistency in how these cases were handled nationwide, and to potentially simplify the process of discharging student loans in bankruptcy.
These guidelines specify the factors considered in assessing each prong of the undue hardship test. The factors appear to be fairly reasonable and flexible and are a huge change that should greatly benefit debtors. The DOJ also notes that the absence of any of these factors may not automatically disqualify a debtor from a student loan discharge. Included now is an attestation form to help a debtor demonstrate how he or she satisfies the undue hardship test and offers an opportunity to explain other factors that the DOJ should consider in reviewing a case. This attestation form should allow the DOJ to stipulate to facts in this case and identify whether an undue hardship is present.
A debtor seeking to eliminate student loans in bankruptcy must still satisfy the three factors of the Brunner Test but the DOJ has broadened them significantly. A debtor must show that he or she cannot afford a monthly student loan payment while maintaining a modest budget. That debtor must also be working in the field of the degree obtained (if completed a program and obtained a degree) and/or attempting to maximize earning potential. That debtor still needs to show a future inability to repay those loans. Finally, the borrower must also show an effort to repay those student loans. Some factors to demonstrate good faith include making some payments, seeking an income-driven repayment plan, a deferment or forbearance, or seeking assistance from the lender about repayment options.
Another thing to keep in mind is that the DOJ acknowledged the possibility of a partial discharge where appropriate. A typical scenario for a partial discharge is where a debtor has the ability to make some student loan payment but not enough for full repayment.
Sounds great, right?
Yes and no. For one, these guidelines are subject to review after one year so this may only be a short-term solution. The Department of Justice can also change their position at a later time. It may be due to a change in administration or in an effort to pressure lawmakers into taking decisive action to properly address student loans and bankruptcy. While the Department of Justice and Department of Education can stipulate that repayment of student loans would constitute an undue burden, it is ultimately on the bankruptcy judges to make a final determination and may still require a greater showing to meet the undue hardship test.
The attestation form also requires a debtor to list all assets. It is unclear how that will be used or whether the DOJ will require a debtor to liquidate assets to pay some or all of a student loan. They made it clear that just because an asset is exempt from a trustee’s liquidation, that does not mean a debtor may still keep that asset while eliminating student loans.
There’s also one more catch. The DOJ memorandum ends with a footnote stating that the guidelines only apply to future bankruptcy filings and those pending at the time the guidelines were issued. Those who lived on credit cards to try to keep up with student loan payments and filed bankruptcy to eliminate that credit card debt are seemingly out of luck. Their only avenue for relief may be to refile (if enough years have passed) and seek a discharge on the student loans.
Final thought:
This is a huge opportunity to eliminate student loans in bankruptcy. However, this is not law and not the grand solution we are all seeking. It will take an act from Congress to amend the Bankruptcy Code to outline a path to discharge student loans. Only then can we ensure that debtors nationwide are treated equally in their quest to eliminate their student loans. For now, only time will tell how courts will respond in dischargeability actions.
If you have student loans and are struggling to keep with payments while keeping up with basic living expenses, please contact Zimmelman Law PLLC to discuss your financial situation and see if these new guidelines can help you eliminate your student loans and any other debt.
Zimmelman Law PLLC
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